OUTLINES  OF  PUBLIC  FINANCE 


OUTLINES  OF  PUBLIC  FINANCE 

Copyright,  1921,  by  Harper  &  Brothera 

Printed  in  the  United  States  of  America 

P-TT 


TO 

EVANGELINE  GROVES  HUNTER 

MY  CONSTANT  AID  AND 

INSPIRATION 


48338 


CONTENTS 

PAGE 

PREFACE xv 

CHAPTER  I.     INTRODUCTION 1 

Public  Finance  Has  Distinguishing  Characteristics — The  Word 
Finance  Has  No  Definite  Meaning — Public  Finance  Is  a  Division 
of  Economics — Public  Finance  Is  Related  to  Other  Sciences — 
Different  Methods  of  Study  May  Be  Used — The  Systematic 
Study  of  Fiscal  Problems  Began  in  Italy — French  and  German 
Scholars  Followed  Italian  Writers  in  the  Study  of  Fiscal  Prob- 
lems— Modern  Fiscal  Systems  Have  Well-defined  Characteristics 
— The  Interest  in  Public  Finance  Is  Increasing — Public  Finance 
May  Be  Studied  Under  Different  Heads — Supplementary  Read- 
ing Should  Be  Followed. 

CHAPTER  II.    CHARACTERISTICS  OF  PUBLIC  EXPENDITURES  ...      22 
Revenue  Has  Received  More  Study  than  Expenditures — Early 
Writers  Did  Not  Entirely  Neglect  Public  Expenditures— Early 
Systems  of  Expenditure  Were  Simple — The  Nature  of  Public  4- 
Expenditure  Differs  from  Private  Expenditure — The  Nature  of 
Public  Expenditures  Has  Changed  with  Changes  in  Forms  of 
Government — The  Universal  Tendency  of  Public  Expenditure  V 
Has  Been  to  Increase — Increase  in  Public  Expenditure  Is  Not 
Confined  to  Any  Political  Unit — Expenditures  in  the  United 
States  Show  an  Upward  Trend — Increasing  Expenditures  Can-         , 
not  Be  Considered  Apart  from  Other  Factors — Many  Causes  Are 
Responsible  for  the  Growth  of  Public  Expenditures — Public  Ex- 
penditures Supply  the  Less  Material  Wants — All  Public  Ex- 
penditures Cannot  Be  Justified — Public  Expenditures  Have  Im- 
portant Economic  Effects — An  Accurate  Comparative  Study  of 
Public  Expenditures  Is  Difficult — Attempts  to  Find  a  Proper    ---• 
Proportion  of  Expenditure  to  National  Income  Have  Failed. 

CHAPTER  III.    CLASSIFICATION  OF  PUBLIC  EXPENDITURES    ...      46 
Many  Bases  Have  Been  Used  in  Attempting  to  Classify  Ex- 
penditures— Some  Attempts  at  Classification  Have  Been  Un- 
satisfactory— The  United  States  Census  Bureau  Classifies  Ex-    - 
penditures — Expenditures  May  Be  Divided  into  Four  Classes, 
According  to  Benefit  Conferred — Important  State  Services  Are 
Found  in  Each  Class  of  Expenditure — Reference  to  Statistics 
Shows  Relative  Importance  of  Principal  Expenditures — Expendi- 


viii  CONTENTS 

PAGE 

ture  for  Protection  Is  an  Important  Item — States  and  Cities 
Make  Expenditures  for  Protection — Expenditures  for  the  Gen- 
eral Government  Are  for  the  Common  Benefit — Consular  and 
Diplomatic  Services  Have  Been  Expensive — Expenditures  for 
Education  Have  Been  Large — Highways  Are  an  Important 
Cause  of  Public  Expenditure — The  Regulation  of  Private  Indus- 
try Is  an  Item  of  Increasing  Importance — Many  Miscellaneous 
Expenditures  Are  Made  for  the  Common  Benefit — The  Cost  of 
Providing  for  Dependents,  Defectives,  and  Delinquents  Is  Large 
— Governments  Often  Give  Pensions  and  Bounties  to  Individ- 
uals— Some  Expenditures  Are  for  Individual  as  Well  as  Common 
Benefit — Some  Expenditures  Are  Primarily  for  the  Individual. 

CHAPTER  IV.    THE  DEVELOPMENT  OF  PUBLIC  REVENUE  ....      74 

Most  Demands  of  the  Modern  State  Are  Monetary — Gratuitous 
Services  to  the  State  Are  Unsatisfactory — Public  Revenues  Re- 
ceived Many  Early  Classifications — The  Question  of  Public 
Lands  Has  Been  Important — The  United  States  Has  Disposed 
of  Her  Public  Lands — Agitation  for  the  Public  Retention  of 
Forests  and  Mines  Has  Been  Increasing — States  May  Success- 
fully Conduct  Some  Forms  of  Industry — The  Post  Office  Is  a 
Good  Example  of  Government  Enterprise — States  Enter  Many 
Fields  of  Activity — Public  Ownership  Has  Had  Most  Rapid  Ex- 
tension in  Municipalities — Revenue  Has  a  Place  of  Relatively 
Small  Importance  in  Modern  Public  Enterprise — The  United 
States  Census  Bureau  Classifies  Revenues — Statistics  Show  the 
Rapid  Growth  in  Revenues  Secured  by  Governments — The 
Majority  of  Modern  Revenue  Is  Secured  by  Compulsion. 

CHAPTER  V.    TAXATION 97 

Many  Ideas  of  Taxes  Are  Inaccurate — Some  Terms  Used  in  Con- 
nection with  Taxes  Are  Important — The  Economic  Effect  of 
Taxes  Has  Received  Much  Consideration — Adam  Smith  Gave 
Four  Maxims  in  Regard  to  Taxes — Many  Attempts  Have  Been 
Made  to  Classify  Taxes-praxes  May  Be  Justified  but  Not  Meas- 
ured by  the  Benefits  Conferred  by  the  State — Faculty  Is  Usually 
a  Satisfactory  Measure  for  Taxes — Many  Problems  Arise  in 
Measuring  Ability — The  Social  Aspects  of  Taxes  Deserve  Con- 
sideration— States  Do  Not  Always  Attempt  to  Follow  Principles 
of  Justice  in  Levying  Taxes. 

CHAPTER  VI.  FEES,  SPECIAL  ASSESSMENTS,  AND  OTHER  REVENUES  120 
Several  Factors  May  Be  Considered  in  Classifying  Revenues- 
Fees  Have  an  Important  Place  in  Revenue  Systems — The  Char- 
acteristics of  Fees  Vary — Fees  Have  Held  an  Important  Place 
in  the  Fiscal  Systems  of  European  Countries— Fees  Have  Been 
Used  Extensively  in  the  United  States — Fees  Have  Important 
Social  and  Political  Aspects— Special  Assessments  Resemble 


CONTENTS  ix 

PAGB 

Taxes  and  Fees— The  Special  Assessment  Has  Been  Used  More 
Extensively  in  the  United  States  than  in  Europe — The  Justice 
of  Special  Assessments  Has  Not  Been  Destroyed  by  Difficulties 
Encountered  in  Their  Use — Prices  Are  Paid  for  Commercial 
Services  Supplied  by  the  Government — States  Have  Sources  of 
Revenue  of  Minor  Importance. 

CHAPTER  VII.    REVENUE  SYSTEMS  OF  IMPORTANT  COUNTRIES  .    .    138 

Modern  Revenue  Systems  Have  Developed  Since  Feudalism — 
Early  Taxes  in  England  Took  a  Variety  of  Forms — Later  Eng- 
lish Taxes  Are  More  Permanent — Indirect  Taxes  Play  an  Im- 
portant Role  in  the  Fiscal  System  of  France — The  Prussian  Tax 
System  Has  Had  a  Systematic  Development — Fiscal  Develop- 
ment in  American  Colonies  Was  Not  Uniform — The  Central 
Government  Encountered  Difficulties  in  Financing  the  Revolu- 
tion— The  Federal  Constitution  Contains  Important  Fiscal  Pro- 
visions— Numerous  Taxes  Make  Up  the  Revenues  of  the  United 
States — Definite  Tendencies  Are  Indicated  by  Fiscal  Systems. 

CHAPTER  VIII.    THE  SHIFTING  AND  INCIDENCE  OF  TAXES  ....    157 

The  Justice  of  a  Tax  May  Depend  on  Its  Shifting  and  Incidence 
— A  Study  of  Shifting  and  Incidence  Is  Fundamentally  a  Study 
of  Price — General  Poll  and  Income  Taxes  Cannot  Be  Shifted — 
Land  Taxes  Are  Often  Called  Burdenless  Taxes — Taxes  on 
Buildings  May  Be  Shifted — The  Capitalization  Theory  Has  Been 
Ably  Criticized— All  Taxes  on  Monopolies  Will  Not  Be  Shifted 
to  the  Consumer — Taxes  on  Competitively  Produced  Goods 
Have  Varying  Effects — Shifting  of  Taxes  Is  Influenced  by  the 
Elasticity  of  Supply  and  Demand. 

CHAPTER  IX.    CUSTOMS  DUTIES 177 

Modern  Customs  Duties  Apply  Chiefly  to  Imports — Various 
Motives  May  Prompt  the  Levy  of  Customs  Duties — The  Inci- 
dence of  Customs  Duties  Is  Important — Problems  Arise  from 
the  Use  of  Customs  Duties — Definite  Principles  Should  Be  Fol- 
lowed in  Levying  Customs  Duties — Early  United  States  Tariffs 
Combined  Fiscal  and  Protective  Aspects— The  War  of  1812  In- 
creased the  Sentiment  for  Protection — The  High  Tariffs  Were 
Followed  by  Reduced  Rates— The  Panic  of  1857  and  the  Civil 
War  Changed  the  Course  of  Tariff  Rates — Revenue  Is  Given 
First  Consideration  in  English  Tariffs — Other  Countries  Have 
Used  Tariffs  for  Industrial  and  Fiscal  Purposes. 

CHAPTER  X.    EXCISE,  CAPITATION,  AND  BUSINESS  TAXES  ....    202 

The  Federal  and  State  Governments  Impose  Many  Taxes — Ex- 
cise Duties  Are  Taxes  upon  Consumption — The  Use  of  Excise 
Taxes  Presents  Various  Problems — Excise  Taxes  May  Have 
Industrial  and  Social  Effects — Different  Methods  Are  Used  in 


x  CONTENTS 

PAGE 

Levying  Excise  Taxes — Excise  Taxes  Will  Continue  to  Form  a 
Part  of  Fiscal  Systems— The  United  States  Has  Effective  Ma- 
chinery for  Administering  Excises — The  United  States  Did  Not 
Use  Excises  Extensively  Before  the  Civil  War— The  Civil  War 
Excises  Have  Been  Permanently  Retained — Excise  Taxes  Have 
Important  Places  in  Foreign  Fiscal  Systems — Government  In- 
dustries May  Have  Effect  of  Excise  Taxes — Capitation  Taxes 
Are  No  longer  Important  in  Fiscal  Systems — Business  Taxes 
Have  Been  Extensively  Developed  in  France  and  Prussia — 
Business  and  License  Taxes  May  Be  Extended  by  American  Fis- 
cal Authorities. 

CHAPTER  XL    PROPERTY  TAXES 230 

Taxes  on  Property  Have  Developed  from  Early  Times — Demo- 
cratic Ideals  Have  Influenced  the  Tax  System — The  Southern 
and  Western  States  Present  Centralized  Tax  Systems — Some 
Features  of  the  Early  Property  Tax  Do  Not  Now  Exist — Marked 
Variations  Occur  in  the  Assessment  of  Real  Property — Much 
Personal  Property  Is  Not  Assessed — Difficulties  Arise  in  Exempt- 
ing Property  from  Taxation — Evils  of  Double  Taxation  Arise 
with  the  Use  of  Personal  Property  Taxes — The  Proper  Handling 
of  Indebtedness  Is  Difficult— The  Personal  Property  Tax  Dis- 
criminates Among  Classes — The  Personal  Property  Tax  De- 
grades the  Morals  of  Citizens — The  General  Property  Tax  Is 
Intrenched  in  the  United  States. 

CHAPTER  XII.    PROPERTY  TAX  REFORM 256 

Constitutional  Provisions  Present  Difficulties — Attempts  Have 
Been  Made  to  Correct  Real  Estate  Assessments — Many  Devices 
Are  Used  in  Personal  Property  Assessments — Classification  of 
Property  for  Taxation  Has  Been  Attempted — Limitations  Have 
Been  Placed  upon  Tax  Rates  and  Borrowing  Power — The  Sep- 
aration of  Sources  of  Revenue  Has  Been  Advocated — The  Pres- 
ent Tendency  Is  to  Centralize  Fiscal  Authority — The  State  Tax 
Commission  Presents  the  Best  Example  of  Centralization — Tax- 
ation of  Property  Remains  Unsatisfactory. 

CHAPTER  XIII.    INCOME  TAXES 278 

The  Use  of  Income  Taxes  Represents  a  Developed  Fiscal  System. 
— Difficulties  Arise  in  Denning  Income — The  Concept  of  Income 
Is  Sometimes  Modified  to  Conform  to  Justice  in  Taxation — Vari- 
ations Occur  in  Methods  of  Levying  Income  Taxes — Fiscal  Au- 
thorities Meet  Difficulties  in  Ascertaining  and  Classifying  In- 
comes— The  Income  Tax  Has  Been  Successfully  Used  in  England 
— Prussia  Has  Used  Income  Taxes  Successfully — Many  Other 
Foreign  Countries  Use  the  Income  Tax — Federal  Income  Taxes 
in  the  United  States  Have  Had  No  Systematic  Development- 
Federal  Income  Taxes  Were  Attempted  in  1894— The  Present 


CONTENTS  xi 

PAGE 

Federal  Income  Tax  Was  Made  Possible  Through  a  Constitu- 
tional Amendment — The  Income  Tax  Was  Modified  by  the 
Revenue  Act  of  1916 — Defects  Appear  in  Federal  Income  Taxa- 
tion— Income  Taxes  Have  Been  Used  by  Several  States. 

CHAPTER  XIV.    INHERITANCE  TAXES 309 

The  Inheritance  Tax  Is  Not  of  Recent  Origin — The  Inheritance 
Tax  Was  Much  Discussed  by  Early  Economists — The  Inherit- 
ance Tax  Is  Widely  Advocated  at  Present — Some  Justify  the  In- 
heritance Tax  as  a  Regulator  of  Fortunes — The  Benefit  Theory 
Has  Been  Applied  to  Taxing  Inheritances — The  Inheritance  Tax 
Conforms  to  Modern  Fiscal  Concepts — Most  Objections  to  the 
Inheritance  Tax  Are  Weak — The  Courts  Have  Strengthened  the 
Position  of  the  Inheritance  Tax — Problems  Arise  in  Formulating  / 
Inheritance  Tax  Laws — Conflicting  Jurisdictions  Create  Serious  1 
Problems — The  Federal  Government  Has  Not  Regularly  Used 
Inheritance  Taxes — Inheritance  Taxes  Are  Important  in  the 
Fiscal  Systems  of  Some  States — The  Inheritance  Tax  Is  Used 
Extensively  Abroad. 

CHAPTER  XV.    TAXATION  OF  CORPORATIONS  *' 335 

Different  Causes  Have  Placed  Special  Taxes  on  Corporations — 
Special  Corporation  Taxes  Take  the  Form  of  Franchise  Taxes 
— Taxation  of  the  Franchise  to  Be  Presents  Serious  Problems — 
Taxes  upon  Capital  Have  Been  Most  General — Public  Utilities 
Frequently  Have  Been  Subject  to  Special  Taxes — A  Tax  on 
Gross  Earnings  Presents  Difficulties — Taxes  on  Net  Earnings 
Have  Not  Been  Satisfactory — Taxes  on  Value  Are  Becoming 
More  Popular — Taxes  on  Public  Utilities  Are  No  Longer  Needed 
for  Regulation — New  York  Furnishes  the  Best  Example  of 
Special  Franchise  Taxation — Some  Corporations  Have  Been 
Taxed  in  Special  Classes — Taxation  of  Foreign  Corporations  Has 
Proved  Troublesome — The  Federal  Government  Taxes  Corpora- 
tions— Taxes  Have  Been  Placed  upon  theJTransfer  of  Corporate 
Securities. 

CHAPTER  XVI.  THE  SINGLE  TAX  *  .  "  .  .  ~ .  f  .  >•'. T  .  * .  5 .  .  .  363 
The  Proposal  for  a  Single  Tax  Is  Not  a  New  One— Henry  George 
Was  Responsible  for  the  Modern  Single  Tax  Proposal — The  Single 
Tax  Program  Has  a  Broad  Social  as  Well  as  Fiscal  Significance — 
The  Principle  of  Natural  Rights  Is  Not  Generally  Indorsed — 
Social  Values  and  Unearned  Increments  Are  Not  Confined  to 
Land— The  Social  Claims  for  the  Single  Tax  Have  Not  Been 
Proved— The  Use  of  the  Single  Tax  Would  Reveal  Undesirable 
Features  and  Difficulties — The  Burden  of  the  Single  Tax  Would 
Be  Most  Severely  Felt  by  Rural  Districts — Various  Tactics  Have 
Been  Employed  in  Propagating  the  Single  Tax — The  Single  Tax 
Campaign  in  Oregon  Did  Not  Show  Substantial  Results — The 


xii  CONTENTS 

Advocates  of  the  Single  Tax  Have  Been  Active  in  Other  States 
— The  Single  Tax  Has  Found  Adherents  Outside  the  United 
States — The  Single  Tax  Agitation  Has  Emphasized  Defects  in 
Our  Fiscal  System. 

CHAPTER  XVII.    PUBLIC  INDEBTEDNESS 387 

Indebtedness  Is  Characteristic  of  Modern  Fiscal  Systems — All 
Aspects  of  Public  and  Private  Debts  Are  Not  the  Same — The 
Economic  and  Political  Effects  of  Public  Indebtedness  Are  Im- 
portant— All  Countries  Have  Not  Taken  the  Same  Attitude 
Toward  Extinguishing  the  Public  Debt — Public  Debts  May 
Take  a  Variety  of  Forms — Many  Problems  Arise  in  Floating  a 
Bond  Issue — Administering  a  Public  Debt  Presents  Complex 
Problems — A  Study  of  Indebtedness  in  the  United  States  Pre- 
sents Interesting  Conclusions — The  Indebtedness  of  Many  ^ 
Countries  Has  Reached  Vast  Proportions. 

CHAPTER  XVIII.    THE  ADMINISTRATION  OP  PUBLIC  FUNDS       .     .    414 

The  Importance  of  Proper  Fiscal  Administration  Has  Been 
Underestimated — The  Administration  of  Public  Funds  Should 
Harmonize  with  Other  Institutions — The  Expenditure  of  Public 
Funds  Is  Carefully  Scrutinized — Revenues  and  Expenditures 
Should  Be  Closely  Correlated — England  Has  Done  Much  to 
Systematize  Her  Fiscal  Operations — Many  European  States  Use 
a  Form  of  Budget — -The  Fiscal  Machinery  of  Canada  Resembles 
That  of  England — Budget  Development  in  the  United  States 
Has  Been  Toward  an  Unsystematic  System — The  Present  Plan 
of  Estimating  Revenues  and  Expenditures  Is  Unsatisfactory — 
Much  Agitation  for  Budget  Reform  Has  Developed — The  Bud- 
get System  of  Fiscal  Administration  Is  Found  in  Many  American 
States — The  Administration  of  Municipal  Finance  Is  Receiving 
Much  Attention — The  Outlook  for  Proper  Fiscal  Administration 
Is  Encouraging. 

CHAPTER  XIX.    FINANCING  AN  EMERGENCY 445 

Expenditures  for  War  Furnish  the  Best  Examples  of  Emergency 
Financiering — The  Problem  Is  to  Secure  Revenue  or  Materials 
— Borrowing  Possesses  Some  Evident  Advantages — Borrowing  Is 
Likely  to  Increase  the  Cost  of  War — Borrowing  Does  Not  Shift 
the  Burden  of  War  to  the  Future — The  Extensive  Use  of  Taxes 
Has  Much  to  Commend  It — Borrowing  Usually  Has  a  Legiti- 
mate Place  in  Emergency  Financiering — The  Proper  Combina- 
tion of  Loans  and  Taxes  Forms  the  Best  War  Finance  Policy — 
Earlier  Wars  of  the  United  States  Were  Financed  Largely 
Through  Borrowing — The  United  States  Made  Extensive  Use 
of  Taxes  in  Financing  the  Great  War — Administrative  Problems 
Developed  from  the  Tax  Laws — The  United  States  Borrowed 
Extensively  During  the  Great  War — Fiscal  Problems  Did  Not 


CONTENTS  xiii 

PAGE 

End  with  the  War — England  Financed  the  War  Through  a  Com- 
bination of  Loans  and  Taxes — The  Revenue  of  France  Was 
Secured  Largely  by  Borrowing — The  Central  Powers  Used  Loans 
Most  Extensively — The  Methods  Used  by  the  Different  Coun- 
tries Present  Interesting  Comparisons. 

CHAPTER  XX.    THE  COST  OP  THE  WAR 484 

The  Cost  of  War  Presents  a  Variety  of  Aspects — The  United 
States  Was  Not  Free  from  War  Costs  During  Its  Early  History 
— The  Civil  War  Augmented  Our  War  Burden — The  Cost  of  the 
Great  War  Eclipsed  Any  Previous  War  Expenditures — The  Ex- 
pansion of  Money  and  Credit  Greatly  Affected  the  War  Cost — 
The  Indirect  Costs  of  the  War  Must  Not  Be  Overlooked. 

CHAPTER  XXI.    CONCLUSION 506 

The  Fiscal  Burden  Will  Continue  to  Be  Large— Different  Politi- 
cal Units  Will  Use  the  Same  Bases  for  Taxes — The  Social  Point  of 
View  Has  Gamed  in  Prominence — The  Employment  of  Fiscal 
Experts  Is  Encouraging — The  Study  of  Fiscal  Subjects  Is  In- 
creasing— A  More  Enlightened  Public  Is  Needed — Tax  Laws 
Need  Simplification — Attempts  Have  Been  Made  to  Outline  a 
Model  System  of  Taxation. 

INDEX  519 


PREFACE 

INTEREST  in  fiscal  problems  has  grown  rapidly.  Twenty- 
five  years  ago  the  subject  matter  of  Public  Finance 
aroused  comparatively  little  discussion.  While  public  ex- 
penditures were  continually  on  the  increase,  wealth  and 
population  were  increasing  more  rapidly,  so  that  no  greater 
per  capita  burden  was  felt  by  the  citizen.  To-day  the 
situation  is  different.  The  demands  upon  the  public  purse 
have  become  so  large,  because  of  extended  and  increased 
governmental  activities,  that  the  burden  of  taxes  has 
begun  to  be  felt,  and  in  many  cases  it  has  begun  to  cut 
deeply.  A  few  decades  ago,  therefore,  the  principles  of 
Public  Finance  primarily  commanded  the  interest  of  pub- 
lic officials,  while  at  present  the  citizen  upon  whom  the 
tax  burdens  fall  is  also  interested.  He  is  beginning  to  ask 
what  is  being  done  with  the  funds  he  has  paid  in  taxes, 
whether  he  is  paying  more  than  his  share,  whether  the 
funds  are  properly  handled,  and  what  can  be  done  to 
secure  a  better  fiscal  system. 

The  nature  and  rapid  increase  of  public  expenditures, 
as  well  as  the  objects  for  which  they  are  made,  have  be- 
come of  general  interest.  The  public  has  learned  to  place 
so  much  reliance  upon  the  activities  of  the  government 
that  it  is  continually  demanding  that  new  activities  be 
undertaken  and  that  old  ones  be  carried  out  more 
efficiently.  The  per  capita  expenditures  of  the  cities  for 
education,  and  the  expenditures  of  the  states  for  educa- 
tion and  the  care  of  defectives,  delinquents,  and  depend- 
ents, have  reached  an  amount  that  would  have  been 
considered  enormous  a  few  years  ago.  The  nature  of  the 
expenditures  of  the  different  political  units,  the  extension 


xvi  PREFACE 

of  governmental  activities,  accompanied  by  increased  tax 
burdens,  have  caused  the  individual  to  weigh  more  care- 
fully the  resulting  utilities.  The  greatest  item  of  expendi- 
ture, and  the  one  which  has  made  tax  burdens  most  press- 
ing, has  been  for  war  or  the  preparation  for  war.  The 
Great  War  has  caused  the  indebtedness  of  the  principal 
nations  to  reach  figures  which  are  incomprehensible,  the 
burden  of  which  will  last  for  years.  Consequently,  the 
nature  and  growth  of  public  expenditures,  the  forms  and 
costs  of  public  indebtedness,  the  possible  methods  of 
financing  an  emergency,  such  as  a  war,  as  well  as  the  direct 
and  indirect  costs  of  war,  are  no  longer  of  interest  to  fiscal 
officials  alone,  but  are  commanding  the  attention  of  the 
general  public,  upon  which  the  burden  finally  rests. 

The  rapid  increase  in  public  expenditures  has  made  it 
necessary  to  seek  new  fields  for  revenue,  and  the  taxpayer 
has  come  to  demand  a  justification  for  the  new  taxes  he  is 
called  upon  to  pay.  The  Federal  government  still  relies 
extensively  upon  customs7  duties  and  excise  taxes,  and 
these,  of  course,  deserve  consideration;  but  in  recent 
years  it  has  begun  to  use  corporation  taxes,  income  taxes, 
excess  profits  taxes,  and  inheritance  taxes.  The  states 
have  ceased  to  secure  their  entire  amount  of  revenue  from 
property  taxes,  but  are  using  corporation  taxes,  business 
and  license  taxes,  income  taxes,  and  inheritance  taxes  as 
well.  The  localities  are  supplementing  property  taxes 
with  numerous  license  payments.  These  are  taxes  the 
burden  of  which  the  citizen  is  required  to  bear,  and  he 
not  only  has  the  right  to  know  something  of  their  merits 
and  difficulties,  but  it  is  his  duty  to  be  informed.  To 
accomplish  this  a  somewhat  extended  discussion  of  each 
of  these  forms  of  revenue  becomes  necessary. 

The  pressure  of  the  tax  burden  has  caused  much  con- 
cern about  justice,  the  pointing  out  of  many  problems, 
followed  by  many  suggestions  for  reform.  The  proper 
method  of  levying  a  tax,  together  with  its  shifting  and 
incidence,  can  be  properly  understood  only  when  the  dis- 


PREFACE  xvii 

cussion  is  based  upon  sound  economic  principles.  Loose 
thinking,  which  has  otherwise  resulted,  has  been  respon- 
sible for  the  proposal  of  reforms  which  cannot  stand 
under  the  light  of  reason.  Some  of  these,  such  as  the 
single  tax,  have  been  propagated  to  such  an  extent  as  to 
need  special  emphasis,  while  others  can  be  dismissed 
much  more  easily. 

It  is  to  help  the  student,  the  general  reader,  and  the 
public  official  to  secure  a  better  understanding  of  the 
nature  of  public  expenditures  and  revenues,  and  the  prin- 
ciples which  underlie  a  sound  fiscal  system,  that  the  fol- 
lowing chapters  have  been  written.  They  are  in  no  sense 
an  exhaustive  treatment,  but,  as  the  title  of  the  book  in- 
dicates, an  outline,  which  could  easily  be  expanded.  An 
attempt  has  been  made  to  eliminate  tedious  theoretical 
and  philosophical  discussions,  which  cannot  easily  be 
understood,  as  well  as  to  limit  the  amount  of  historical 
material.  Some  theory  will,  of  course,  be  found  in  the 
necessary  underlying  economic  principles,  and  historical 
backgrounds  and  illustrations  will  frequently  be  used. 
Primarily,  however,  the  purpose  is  to  emphasize  the  prac- 
tical aspects  of  the  field  of  Public  Finance,  and  to  acquaint 
the  taxpaying  citizen  with  the  important  aspects  of  ex- 
penditures and  revenues  with  which  he  is  continually 
coming  in  contact. 

In  a  book  of  this  nature  it  is  impossible  to  acknowledge 
all  the  sources  to  which  one  is  indebted.  Much  of  the 
material  has  been  collected  from  general  reading  for  my 
courses  in  Public  Finance  and  Taxation,  and  acknowledg- 
ment must  be  made  to  all  the  important  writers  in  this 
field.  I  cannot  refrain  from  mentioning  Profs.  A.  A. 
Young  and  T.  S.  Adams,  under  whose  instruction  my 
interest  in  fiscal  problems  began  to  develop.  Many  of 
my  friends  and  colleagues  at  the  University  of  Illinois 
have  rendered  valuable  assistance.  Dean  Charles  M. 
Thompson  has  devoted  much  time  to  reading  the  manu- 
script and  has  given  many  valuable  suggestions,  as  has 


xviii  PREFACE 

also  my  colleague,  Prof.  N.  A.  Weston.  Mr.  E.  E.  Leisy, 
of  the  department  of  English,  carefully  read  the  entire 
manuscript  for  corrections  in  composition.  Others  have 
assisted  in  reading  proof  and  in  numerous  other  ways,  an 
indebtedness  to  whom  I  hereby  acknowledge. 

M.  H.  HUNTER. 

URBANA,  ILLINOIS, 
July  1,  1921. 


OUTLINES  OF  PUBLIC  FINANCE 


CHAPTER   I 

INTKODUCTION 

z*  Public  Finance  Has  Distinguishing  Characteristics. 

— Man  is  by  nature  a  social  being,  and  consequently 
seeks  the  association  of  his  fellow  creatures.  As  this 
association  develops  and  becomes  more  complex,  the 
need  for  establishing  and  enforcing  certain  regulations 
appears,  and  governments  are  inaugurated  to  safeguard 
property  and  insure  the  orderly  conduct  of  the  com- 
munity. The  extent  of  governmental  activities  depends 
largely  upon  the  degree  of  advancement  in  civilization. 
Among  the  primitive  and  backward  peoples,  the  functions 
of  governments  are  few  and  ill  defined;  whereas  in 
highly  civilized  states  they  are  numerous  and,  although 
often  very  complex,  they  are,  nevertheless,  well  defined. 
The  march  of  progress  in  the  development  of  government 
is  from  the  simple  to  the  complex,  and  the  more  complex 
the  organization  the  more  numerous  and  difficult  are  the 
problems  which  present  themselves. 

The  members  of  an  advanced  social  group  frequently 
fail  to  comprehend  the  extent  to  which  they  are  indebted 
to  their  government  for  the  services  which  it  renders 
them.  The  Constitution  of  the  United  States,  for  ex- 
ample, guarantees  to  the  citizen  the  protection  of  life, 
liberty,  property,  and  the  pursuit  of  happiness;  yet  he 
often  forgets  that  this  guarantee  entails  the  maintenance 
of  armies  and  navies,  of  legislatures  and  judicial  systems. 


2  '    OUTLINES  OF  PUBLIC  FINANCE 

Th*  postman  makes  his  semi-daily  delivery  of  mail 
without  a  consideration  by  the  ordinary  citizen  as  to 
why  or  how.  The  modern  progress  in  science,  literature, 
agriculture,  industry,  and  commerce  is  a  matter  of  pride 
to  every  citizen,  although  the  contribution  of  the  various 
governmental  units  toward  such  progress  is  often  for- 
gotten.  Government  aid  has  fostered  the  development 
of  educational  institutions,  the  result  of  which  has  been 
that  the  development  of  science  and  literature  has  been 
hastened;  experiment  stations  and  schools  have  trans- 
formed agricultural  methods;  active  health  campaigns 
have  wiped  out  the  cause  of  diseases  and  pestilence; 
patent  laws  have  stimulated  inventions  for  the  develop- 
ment of  industry,  and  copyright  laws  have  enhanced 
the  quantity  and  quality  of  literature;  while  sound 
currency  and  banking  systems  have  made  possible 
modern  commercial  life. 

A  government  has  no  superhuman  power  in  exercising 
the  important  function  of  supplying  materials  and  serv- 
ices to  a  social  group.  It  cannot  create  the  materials 
and  services,  but  must  either  secure  them  from  some 
already  existing  source,  or  cause  them  to  be  produced, 
either  by  its  own  activities  or  by  the  activities  of  some  other 
agency.  The  methods  used  by  governmental  units  in 
securing  materials  and  services  differ  widely,  and  after 
they  have  been  secured  the  uses  to  which  they  may  be 
put  also  differ  widely.  None  the  less,  it  is  a  part  of  the 
business  of  governments  to  secure  the  means  of  supplying 
the  various  demands  made  upon  it  by  its  citizens.  The 
subject  matter  of  Public  Finance  has  to  do  with  that 
group  of  governmental  functions  which  have  to  do  with 
the  getting  and  using  of  materials  and  services. 

2.  The  Word  "Finance"  Has  No  Definite  Mean- 
ing.— In  the  English  language,  at  least,  no  definite 
meaning  is  attached  to  the  word  " finance."  A  descrip- 
tive adjective  is  often  needed  to  clarify  the  intended 
meaning  and  to  avoid  ambiguity.  Such  expressions  as 


INTRODUCTION  3 

"private  finance/'  " corporation  finance/'  "high  finance/' 
and  " public  finance"  are  common  in  the  daily  newspapers. 
There  are  treatises  on  corporation  finance,  for  example, 
which  explain  the  nature  and  business  methods  of  cor- 
porate organizations.  The  use  of  the  term  "finance" 
in  connection  with  a  firm,  business,  or  individual  fre- 
quently has  reference  to  the  condition  of  the  capital 
or  assets,  as,  for  example,  "the  finances  of  this  business 
are  in  good  condition." 

The  ambiguity  which  arises  with  the  use  of  the  word 
"finance,"  unmodified,  may  be  avoided  when  the  use  of 
the  adjective  is  contemplated.  Two  forms  of  the  word 
appear — •" financial"  and  "fiscal" — and  a  uniform  use  of 
the  words  for  particular  meanings  would  be  conducive  to 
clearness.  The  word  "financial"  has  had  no  definite 
meaning.  A  financial  magazine,  for  example,  treats  of 
stocks,  bonds,  dividends,  and  similar  items,  while  the 
financial  condition  of  a  country  has  to  do  with  its  money, 
credit,  and  banking.  The  word  "fiscal,"  however,  has 
usually  had  a  more  definite  meaning,  although  its  use  has 
not  always  been  clearly  separated  from  that  of  "financial." 
For  the  most  part,  however,  "fiscal"  has  been  used  in 
referring  to  the  expenditures  and  revenues  of  political 
bodies.  A  financial  year,  for  example,  might  refer  to  any 
number  of  conditions,  while  a  fiscal  year  more  definitely 
refers  to  the  revenues  and  expenditures  of  a  political  unit 
for  a  particular  period  of  time.  The  fiscal  year  of  the 
Federal  government  begins  July  1st  and  ends  June  30th. 
In  this  book  the  word  "fiscal"  will  be  used  to  refer  to 
conditions  which  are  related  to  revenues  and  expenditures 
of  political  bodies. 

Public  Finance  is  primarily  concerned  with  fiscal  as- 
pects, yet  these  aspects  are  often  substantially  influenced 
by  financial  circumstances.  A  sound  and  efficient  banking 
and  currency  system,  for  example,  materially  aids  in  the 
collection  and  expenditure  of  public  revenues.  It  may 
not  always  be  possible,  indeed,  to  separate  the  fiscal  from 


4  OUTLINES  OF  PUBLIC  FINANCE 

the  financial  conditions,  as  when,  in  times  of  war,  a  gov- 
ernment issues  fiat  money  or  treasury  notes  for  the  pur- 
pose of  securing  funds.  Fiscal  authorities  are  likewise 
concerned  about  the  financial  conditions  of  industries, 
because  it  is  to  productive  enterprises  that  they  must 
turn  as  an  important  source  of  revenue.  Panics  and 
crises,  moreover,  do  not  affect  industries  alone,  but  the 
fiscal  condition  of  political  bodies  as  well.  A  distinction 
can  generally  be  drawn  between  aspects  of  a  fiscal  and  of 
a  financial  nature,  and  our  concern  in  this  book  will  be 
with  the  former — aspects  which  deal  with  expenditures 
and  revenues  of  governments. 

3.  Public  Finance  Is  a  Division  of  Economics. — 
There  has  been  some  discussion  as  to  whether  the  study 
of  Public  Finance  properly  belongs  in  the  field  of  Econom- 
ics. Some  writers  treat  fiscal  problems  in  their  works  on 
general  economics,  while  others  treat  the  problems 
under  the  caption,  "  Economics  and  Public  Finance." 
Still  other  writers  on  general  economics  give  no  discus- 
sion of  public  expenditures  and  revenues.  The  great 
amount  of  attention  which  has  been  devoted  to  a  dis- 
cussion of  private  consumption,  production,  and  dis- 
tribution has  emphasized  the  importance  of  these  phe- 
nomena, yet  the  fact  remains  that  public  revenues  and 
expenditures  are  of  sufficient  economic  consequence  to 
command  the  attention  of  students  of  economics. 

The  principles  which  underlie  the  study  of  Public 
Finance  are  clearly  the  same  as  those  which  underlie  the 
study  of  the  other  fields  of  economics.  Economics  deals 
with  laws  which  govern  the  activities  of  individuals  in 
the  expenditure  of  energy  to  supply  their  wants.  Public 
Finance  is  also  a  study  of  the  exertion  of  individual  effort 
to  supply  wants.  Governments  secure,  through  taxes  or 
otherwise,  some  of  the  returns  from  individual  effort  as  a 
prerequisite  to  supplying  materials  and  services.  The 
individual  is  concerned  with  comparing  the  utility  fur- 
nished by  the  government  with  the  utility  he  could  have 


INTRODUCTION  5 

secured  had  the  government  made  no  demands  upon  him. 
No  individual  income  can  remain  unaffected  when  a  part 
of  it  is  taken  in  the  form  of  a  tax. 

Public  funds  are  frequently  used,  either  to  aid  private 
production  or  directly  to  carry  on  productive  enterprises. 
Those  who  are  interested  in  efficient  production  must  be 
concerned  about  such  uses  of  public  funds,  and  those  who 
have  the  direction  of  public  funds  for  productive  enter- 
prises should  know  the  economic  principles  upon  which 
efficient  production  rests.  The  successful  management  of 
a  government  industry  must  be  based  upon  just  as  sound 
economic  principles  as  is  a  successful  industry  conducted 
by  individuals.  When  the  effect  of  securing  revenues  in 
different  ways  is  considered  from  the  standpoint  of  jus- 
tice, some  definite  theory  of  distribution  must  be  in  mind. 
The  suggestion  to  adopt  a  rigorous  single  tax,  which  would 
take  the  economic  rent  of  land  in  taxes,  immediately 
arouses  the  interest  of  those  who  are  concerned  with  rents 
and  land  values.  Any  income,  whether  it  is  paid  from  a 
public  purse  or  from  a  private  purse,  is  of  economic  con- 
cern. Fiscal  officials  are  concerned  with  the  relationship 
of  cause  and  effect  in  the  collection  and  use  of  public 
revenues;  here  the  thought  is  guided  by  the  same  eco- 
nomic laws  that  govern  in  the  problem  of  the  distribution 
of  wealth.  The  underlying  principles  of  Public  Finance, 
then,  are  the  same  as  those  upon  which  all  sound  economic 
reasoning  is  based. 

4.  Public  Finance  Is  Related  to  Other  Sciences. — 
The  subject  matter  of  Public  Finance  is  of  such  a  nature 
that  its  study  cannot  be  separated  from  that  of  other 
sciences.  Students  of  the  subject  must  take  frequent 
excursions  into  the  related  fields  of  Political  Science, 
History,  Sociology,  and  Ethics.  Likewise,  those  who  are 
primarily  interested  in  these  related  subjects  find  that 
account  must  be  taken  of  the  workings  of  the  principles 
of  Public  Finance. 

Relation  to  Political  Science  and  History. — The  principles 


6  OUTLINES  OF  PUBLIC  FINANCE 

which  underlie  a  study  of  expenditures  and  revenues  have 
a  dependence  upon  Political  Science  second  only  to  that 
which  they  have  upon  Economics.  The  form  of  govern- 
ment under  which  the  citizens  live  and  the  officials  work 
is  of  the  utmost  importance.  Differences  in  the  method 
of  conducting  fiscal  affairs  would  necessarily  be  found  in 
states  of  autocratic,  democratic,  socialistic,  or  individu- 
alistic governmental  tendencies.  Many  political  re- 
straints exist,  also,  either  because  of  constitutional  or 
legislative  provisions,  which  must  always  be  taken  into 
consideration  by  the  fiscal  student  or  official.  In  the 
United  States,  for  example,  a  tax  would  not  be  levied 
upon  exports  because  of  constitutional  restrictions  to  that 
effect.  Political  expediency,  moreover,  is  often  so  im- 
portant in  fiscal  matters  that  it  takes  precedence  over  the 
soundness  of  economic  principles  which  might  be  applied. 
Revenues  must  be  had  quickly,  at  times,  and  that  method 
is  used  which  will  supply  the  needed  funds,  notwithstand- 
ing the  economic  objections  which  might  be  raised. 

The  interest  in  Political  Science  cannot  be  separated 
from  the  principles  of  Public  Finance.  Revenues  must 
be  secured  to  carry  out  the  policies  of  executives  and 
legislators.  Many  of  the  compromises  which  have  been 
written  into  constitutions  and  statutes  have  been  formu- 
lated by  fiscal  considerations.  Officials  must  always  be 
concerned  about  the  exaction  and  use  of  funds,  for  there 
is  no  surer  and  quicker  method  for  gaining  the  disfavor  of 
a  constituency  than  through  the  misuse  of  public  revenues. 

That  would  be  a  poor  fiscal  policy  which  took  no  con- 
sideration of  the  activities  of  the  past,  with  then-  result- 
ing successes  or  failures.  A  study  of  history,  consequently, 
is  an  invaluable  asset  in  helping  to  formulate  modern 
fiscal  policies.  Countries  have  different  characteristics, 
thek  citizens  have  peculiar  traits,  and  it  is  only  by  a  study 
of  history  that  these  can  be  properly  interpreted.  It  is 
because  of  these  inherent  differences  that  a  successful 
system  for  obtaining  revenues  in  one  country  would  abso- 


INTRODUCTION  7 

lately  fail  to  give  satisfaction  in  another.  The  student  of 
history,  moreover,  can  be  no  less  interested  in  what  Pub- 
lic Finance  has  to  offer.  In  tracing  revolutions  and  con- 
stitutional reforms,  for  example,  he  will  frequently  find 
that  fiscal  considerations  have  had  an  important  in- 
fluence, if,  indeed,  not  an  overwhelming  one. 

Relation  to  Sociology  and  Ethics. — The  problems  of  social 
reform  and  those  of  Public  Finance  are,  at  present,  in- 
separably related.  No  longer  is  the  individual  held  en- 
tirely responsible  for  bettering  social  conditions,  but  the 
various  governmental  units  have  adopted  this  activity  as 
one  of  their  primary  functions.  So  extensively  have  they 
entered  this  field  that  one  of  the  largest  single  items  of 
expenditure  is  for  the  classes  of  delinquents,  defectives, 
and  dependents.  The  enormous  sums  which  are  spent 
annually  upon  social  institutions  are  of  vital  interest  to  the 
students  of  expenditures  and  revenues.  The  student  of 
sociology  is  no  less  interested.  He  must  be  concerned 
with  the  results  of  government  activities  of  this  nature, 
and  compare  these  results  with  what  has  been  accom- 
plished through  other  avenues  of  endeavor. 

Ethical  considerations  must  not  be  omitted  from  the 
discussion  and  formulation  of  fiscal  principles.  When  the 
burden  of  a  tax  does  not  rest  where  it  is  placed,  but  is 
shifted  on  to  some  one  else,  the  question  of  justice  im- 
mediately presents  itself.  The  same  question  also  arises 
when  proposals  are  made  to  tax  some  individuals  or  classes 
at  a  higher  rate  than  others.  The  fiscal  system  is  fre- 
quently called  upon  to  help  solve  the  problem  of  evil 
through  the  regulation  or  elimination  of  undesirable  in- 
dustrial or  social  institutions.  Examples  of  this  are  the 
use  of  taxes  to  eliminate  the  circulation  of  state  bank 
notes,  and  to  regulate  the  use  of  intoxicating  liquors.  It 
is  clearly  demonstrated,  then,  that  Public  Finance  is  far 
from  being  an  independent  science,  but  draws  heavily 
from  other  fields  as  well  as  supplies  much  material  to 
them. 


8  OUTLINES  OF  PUBLIC  FINANCE 

5.  Different  Methods  of  Study  May  Be  Used.— Public 
Finance  is  properly  grouped  among  the  social  sciences, 
and,  as  just  indicated,  it  is  closely  related  to  a  number  of 
these.  Its  field  is  definite  enough,  however,  to  admit  of 
independent  scientific  investigation.  It  deals  at  once 
with  principles  and  their  application ;  it  is,  therefore,  both 
an  art  and  a  science.  The  art  nature  appears  when  the 
formulas  which  have  been  discovered  through  the  scien- 
tific processes  of  investigation  begin  to  be  applied.  It 
was  a  scientific  process,  for  example,  by  which  it  was  dis- 
covered that  the  burden  of  taxes  does  not  always  rest 
where  it  is  first  placed.  The  art  nature  appears  when 
this  principle  of  shifting  burdens  begins  to  be  used  to  cor- 
rect injustices,  and  to  inaugurate  a  more  symmetrical 
fiscal  system.  Both  aspects  are  important — the  scientific 
aspect  to  the  student  who  is  primarily  interested  in  dis- 
covering general  truths  and  laws,  and  the  art  aspect  to 
the  student  who  is  concerned  with  the  application  of 
formulated  principles  for  the  purpose  of  securing  desirable 
changes  in  the  fiscal  conditions. 

Method  of  Study. — Some  writers  have  entered  exten- 
sively into  a  discussion  of  the  proper  methods  of  approach 
to  the  study  of  Public  Finance,  but  space  does  not  war- 
rant an  extended  discussion  of  this  subject  here.  Some 
have  maintained  that  the  study  is  primarily  "  inductive," 
while  others  have  been  just  as  strong  defenders  of  the 
" deductive"  method  of  approach.  As  a  matter  of  fact, 
both  methods  have  a  place  and  are  used  simultaneously. 
Since  it  is  to  a  great  extent  a  derived  science,  it  necessarily 
borrows  a  number  of  rules  and  laws,  which,  as  general 
principles,  are  bases  for  further  reasoning.  With  the  use 
of  these  principles  from  which  to  start,  it  may  be  con- 
sidered as  a  deductive  science.  These  principles  them- 
selves have  been  derived,  on  the  other  hand,  through  the 
processes  of  inductive  reasoning — the  formulations  have 
been  made  only  after  bringing  together  a  number  of  indi- 
vidual cases  from  which  conclusions  could  be  drawn. 


INTRODUCTION  9 

While  the  modern  study,  then,  partakes  of  both  inductive 
and  deductive  reasoning,  yet  its  early  development  was 
marked  by  the  almost  exclusive  use  of  the  inductive 
method.  Comparative  and  historical  studies  also  have  an 
important  place  in  the  study  of  Public  Finance,  for  much 
can  be  gained  from  knowing  what  other  governmental 
units  are  doing  and  have  done  to  determine  fiscal  prin- 
ciples and  to  solve  fiscal  difficulties. 

Extent  of  Study. — More  important  than  method  of 
study,  perhaps,  are  the  classes  of  persons  whose  interest 
Public  Finance  should  command.  The  idea  has  been  too 
prevalent  that  a  knowledge  of  its  principles  would  be  use- 
ful only  to  the  officials  who  are  handling  the  business  of 
the  government,  and  that  they  have  no  practical  applica- 
tion for  the  average  citizen.  No  belief  could  be  more 
erroneous.  While  it  is  of  utmost  importance  that  officials 
who  have  the  direction  of  fiscal  policies  should  be  well 
versed  in  the  underlying  principles  of  Public  Finance,  it 
is  none  the  less  true  that  their  constituents  should  be  well 
informed  in  the  same  field.  Never  before  in  the  history 
of  the  world  has  such  a  knowledge  been  so  vital.  De- 
mocracy has  been  growing  apace,  with  the  prevailing  idea 
that  it  is  the  panacea  for  political  ills.  There  is  no  virtue 
in  self-government  itself  to  cure  these  ills,  nor  is  there  any 
condition  hi  democracy  to  insure  its  survival,  unless  the 
voters  be  properly  grounded  in  the  principles  necessary 
to  insure  an  enduring  state.  The  mere  vote  is  not  suffi- 
cient; the  voting  must  be  intelligent  as  well.  The  manner 
in  which  the  purse  strings  are  controlled  is  of  paramount 
importance,  for  in  no  field  of  governmental  activity  are 
corruption  and  abuse  so  likely  to  creep  in.  The  modern 
writer  should  attempt  to  dispel  the  current  notion  that 
fiscal  treatises  are  dismal  and  uninteresting,  and  should 
aim  to  vitalize  them  in  connection  with  the  life  of  every 
citizen. 

6.  The  Systematic  Study  of  Fiscal  Problems  Began  in 
Italy. — Public  Finance  is,  at  present,  usually  given  a  sub- 


10  OUTLINES  OF  PUBLIC  FINANCE 

ordinate  place  in  the  study  of  economics.  In  the  order  of 
development,  however,  the  study  of  Public  Finance  is 
much  older  than  that  of  the  general  principles  of  eco- 
nomics— in  fact,  it  was  the  center  around  which  the  early 
economic  discussion  developed.  It  was  not  until  after 
the  Middle  Ages,  however,  that  fiscal  problems  reached  a 
degree  of  importance  to  warrant  careful  and  systematic 
investigation.  Before  and  during  the  Middle  Ages  refer- 
ences to  the  fiscal  aspects  of  the  state  are  not  lacking  in 
the  numerous  political  and  historical  writings  which  are 
to  be  found.  During  this  period  the  finances  of  the  state 
were  practically  synonymous  with  those  of  the  prince, 
and  their  study  is  of  the  principles  of  private  finance 
rather  than  that  of  fiscal  problems. 

The  development  of  commerce  and  trade  caused  a 
change  in  the  situation.  Cities  and  city-states  that  had 
little  connection  with  the  domain  of  the  prince  grew  and 
flourished.  The  initial  appearance  of  this  situation  came 
in  Italy.  The  opening  of  the  Mediterranean  route  of 
commerce,  with  its  subsequent  domination  of  world 
trade,  made  Italy  the  commercial  center  of  the  world. 
The  rapid  growth  of  such  city-states  as  Florence  and 
Naples  led  to  a  corresponding  growth  in  their  fiscal  needs. 
It  was  in  these  Italian  city-states  of  the  fifteenth  century, 
moreover,  that  the  first  systematic  study  of  the  principles 
which  are  properly  included  in  the  field  of  Public  Finance 
made  its  appearance.  The  discussion  centered  around 
such  questions  as  progressive  taxation,  the  administration 
of  revenues,  and  a  systematic  classification  of  expenditures. 
Many  of  these  early  ideas  have  much  in  common  with 
modern  expressions  concerning  fiscal  subjects. 

7.  French  and  German  Scholars  Followed  Italian  Writ- 
ers in  the  Study  of  Fiscal  Problems. — By  the  latter  part 
of  the  sixteenth  century  political  organizations  had  so 
changed  that  more  attention  to  fiscal  problems  became 
imperative.  The  disintegration  of  the  feudal  regime 
caused  concern  to  the  public  officials  because  a  remodeling 


INTRODUCTION  II 

of  fiscal  policies  became  necessary.  Jean  Bodin,  a  French- 
man, first  sensed  the  need  for  a  systematic  study  of  these 
changing  political  and  fiscal  conditions.  His  treatise,  Les 
six  Livres  de  la  Republique,  was  published  in  1576,  and 
exerted  a  marked  influence  upon  future  fiscal  and  political 
writings.  He  considered  the  nerves  of  the  state  to  be 
found  in  the  proper  management  of  its  expenditures  and 
revenues,  and  contended  that  revenues  must  be  raised 
honestly,  that  they  must  be  used  for  the  profit  and  honor 
of  the  state,  and  that  a  part  should  be  saved  for  a  tune  of 
need. 

After  the  works  of  Bodin,  a  decided  lull  appeared  in  the 
interest  which  was  given  to  the  study  of  expenditures  and 
revenues  of  the  country.  It  was  not  until  the  eighteenth 
century,  when  the  abuses  of  the  government  in  handling 
the  public  treasury  became  boldly  open  and  flagrant,  that 
any  expressed  interest  in  the  study  of  fiscal  problems  again 
appeared.  The  revival  of  investigations  of  this  nature 
was  begun  by  Vauban,  who  published  his  Project  for  a 
Royal  Tythe  in  1707.  His  plan  centered  around  an  income 
tax  which  was  to  be  supplemented  by  a  number  of  indirect 
taxes.  A  work  which  had  considerable  influence  upon 
future  fiscal  development  was  the  Esprit  des  lois,  which 
was  published  by  Montesquieu  in  1748.  Besides  con- 
demning the  institution  of  public  credit,  he  discoursed  at 
length  upon  the  influence  which  different  forms  of  gov- 
ernment exert  upon  fiscal  systems. 

One  of  the  distinct  contributions  of  the  French  to  fiscal 
and  economic  thought  came  through  the  physiocrats,  of 
which  Quesnay  and  Turgot  were  leaders.  Quesnay  pub- 
lished the  famous  Tableau  ceconomique  in  1758.  He  did 
much  to  develop  a  consistent  theory  of  production  and 
distribution,  and  correlated  his  system  for  securing  rev- 
enues to  the  theory  which  he  developed.  The  theory 
which  was  proposed  for  land  taxes  will  be  noticed  in  a 
subsequent  chapter.1  A  number  of  modern  French  stu- 

1  See  the  chapter,  "The  Single  Tax." 


12  OUTLINES  OF  PUBLIC  FINANCE 

dents,  of  whom  the  best  known  is  Leroy-Beaulieu,  have 
turned  their  attention  to  fiscal  problems.  Leroy-Beau- 
lieu's  works  are  considered  among  the  best  in  the  field  of 
Public  Finance,  and  his  Traite  de  la  Science  des  Finances 
is  especially  worthy  of  study  by  all  who  are  interested  in 
fiscal  problems. 

German  Writers. — German  writers  were  but  little  be- 
hind those  in  France  in  taking  up  a  study  of  the  problems 
connected  with  expenditures  and  revenues.  At  first  the 
influence  of  French  writers  can  be  clearly  discerned,  but 
it  was  not  long  before  the  investigations  of  the  German 
scholars  divorced  themselves  from  foreign  influences. 
Many  writers  have  appeared  in  the  field,  of  whom  the 
first  of  importance  was  Von  Justi.  His  Staatswirthschaft 
was  published  in  1755.  He  treated  public  expenditures 
in  detail,  considered  that  incomes  from  public  domains 
should  be  the  base  for  a  sound  fiscal  system,  yet  treated 
the  economic  and  political  effects  of  the  various  kinds  of 
taxes.  The  large  number  of  treatises  which  the  German 
fiscal  students  have  given  disclose  not  only  an  uninter- 
rupted, but  a  systematic  development  of  fiscal  investiga- 
tions. An  important  work  of  the  early  nineteenth  century 
(1832),  which  treats  different  phases  of  fiscal  problems, 
was  the  Grundsdtze  der  Finanzwissenschaft,  by  K.  H.  Rau. 
More  modern  works  of  a  general  nature  have  been  by  G. 
Cohn  (Finanzwssenschaftj  1889),  and  by  A.  Wagner 
(Finanzwissenschaft,  1883-1899). 

8.  English  and  American  Scholars  Have  Studied  Fis- 
cal Problems.— The  first  real  interest  in  fiscal  problems 
shown  by  English  writers  was  displayed  by  the  transla- 
tion of  Bodin's  work  into  English,  at  the  beginning  of  the 
seventeenth  century.  Some  chance  reference  to  fiscal 
problems  may  be  found  in  earlier  writings,  but  they  are  of 
such  a  nature  as  to  indicate  that  only  a  very  casual  in- 
terest was  taken  in  such  problems.  A  half  century  after 
the  translation  of  Bodin's  work,  Sir  William  Petty  pro- 
duced the  first  English  work  (1662),  a  Treatise  of  Taxes 


INTRODUCTION  13 

and  Contributions,  that  properly  can  be  said  to  deal  with 
the  subject  matter  of  Public  Finance.  His  classifications 
of  expenditures  and  revenues  are  interesting  to  modern 
students.  They  show  the  change  in  the  relative  impor- 
tance of  the  various  items  which  have  been,  and  are,  the 
objects  of  governmental  expenditures. 

The  Wealth  of  Nations. — More  than  a  century  passed 
after  the  publication  of  Petty's  treatise  before  another 
systematic  study  of  fiscal  problems  was  produced.  This 
was  in  1776,  when  Adam  Smith  published  his  Wealth  of 
Nations,  and  thereby  planted  a  new  milestone  in  the 
progress  of  fiscal  development.  Before  this,  however,  the 
continual  increase  of  expenditures  and  indebtedness  in 
England  caused  much  debate,  and  many  half-hearted  sug- 
gestions were  made  for  reform,  yet  nothing  in  the  form  of 
a  systematic  treatise  appeared. 

Adam  Smith  has  received  most  mention  as  an  econo- 
mist. He  has,  indeed,  been  called  the  father  of  Political 
Economy,  and  his  Wealth  of  Nations  is  looked  upon  as  the 
first  general  treatise  on  this  subject.  It  may  just  as  truly 
be  called  the  first  great  treatise  on  that  phase  of  economics 
which  we  now  define  as  Public  Finance.  The  title  of  the 
work  is  indicative  that  the  contents  are  of  this  nature. 
Nations  at  that  tune  were  becoming  more  and  more  con- 
cerned about  the  possible  sources  for  the  increased  rev- 
enues which  growing  expenditures  were  constantly  de- 
manding. The  mercantilistic  school  had  been  advocating 
the  doctrine  of  restrictions  upon  trade,  commerce,  and 
industry,  by  which  it  was  expected  to  bring  more  wealth, 
either  directly  or  indirectly,  into  the  coffers  of  the  state. 

It  was  against  this  artificial  regulation  that  Adam  Smith 
revolted.  He  purposed  to  show  in  his  work  that  a  nation 
could  obtain  a  greater  store  of  wealth,  that  it  could  have 
a  greater  source  of  revenue  if  the  government  would  allow 
trade  and  industry  to  take  their  own  course  through  a 
proper  division  of  labor  and  capitalistic  production.  The 
function  of  the  government,  instead  of  attempting  to 


14  OUTLINES  OF  PUBLIC  FINANCE 

regulate  commerce  and  industry,  was  to  supply  facilities 
to  aid  in  carrying  on  industry,  commerce,  and  exchange, 
such  as  sound  systems  of  currency,  banks,  and  credit. 
This  purpose  explains  his  "inquiry  into  the  nature  and 
causes  of  the  wealth  of  nations." 

The  worth  of  Smith's  treatise  was  soon  recognized,  and 
it  was  almost  immediately  translated  into  a  number  of 
foreign  languages,  and  in  this  way  it  was  destined  to  in- 
fluence the  trend  of  fiscal  thought  for  years  to  come. 
Fiscal  subjects  continued  to  call  forth  discussion  and 
writing,  yet  English  writers  produced  nothing  after  the 
Wealth  of  Nations  until  comparatively  recent  years  which 
can  in  reality  be  called  a  systematic  treatise  on  Public 
Finance.  This  recent  treatise  was  written  by  C.  F.  Bas- 
table  (Public  Finance,  1903).  It  is  still  considered  as  an 
authority  on  the  subject  and  can  be  read  with  profit  by 
all  who  are  interested  in  problems  relating  to  revenues 
and  expenditures. 

Studies  in  the  United  States. — A  systematic  study  of 
fiscal  problems  was  not  made  in  the  United  States  during 
the  earlier  years  of  its  development.  The  functions  which 
the  government  performed  were  few,  and  entailed  little 
expense.  The  citizens  were  prosperous,  and  the  fiscal 
burdens  were  not  seriously  felt.  As  more  public  activities 
were  undertaken,  and  as  the  burden  of  revenues  became 
more  pressing,  inquiries  began  to  be  made  by  individuals 
and  commissions  as  to  possible  changes  and  remedies.  As 
a  result,  many  sporadic  reports  appeared,  yet  no  system- 
atic study  of  fiscal  problems  was  made  until  Henry  C. 
Adams  published  The  Science  of  Finance,  in  1898.  This 
continues  to  be  the  most  important  American  work  in  the 
general  field  of  Public  Finance.  Much  work  has  been  done 
since  then,  the  most  extensive  of  which  has  been  by  D.  A. 
Wells  and  E.  R.  A.  Seligman.  Wells's  book,  The  Theory 
and  Practice  of  Taxation,  appeared  in  1900,  the  nature  of 
which  is  indicated  by  the  title.  Seligman  has  written  a 
number  of  volumes,  the  most  important  of  which  are 


INTRODUCTION  15 

Progressive  Taxation  in  Theory  and  Practice,  published  in 
1908,  Shifting  and  Incidence  of  Taxation,  published  in 
1910,  The  Income  Tax,  published  in  1914,  and  Essays  in 
Taxation,  published  in  1915.  Brief  treatises  of  the  field  of 
Public  Finance  have  been  written  by  W.  M.  Daniels  (The 
Elements  of  Public  Finance,  1899),  and  by  C.  C.  Plehn 
(Introduction  to  Public  Finance,  1920).  Mention  should 
also  be  made  of  the  work  done  by  the  various  tax  commis- 
sions and  by  the  National  Tax  Association,  the  results  of 
which  are  available  in  numerous  reports  and  proceedings. 

9.  Modern  Fiscal  Systems  Have  Well-defined  Char- 
acteristics.— The  rapid  growth  of  democracies  and  con- 
stitutionalism has  been  indicated  in  the  preceding  topic. 
With  this  growth  some  well-defined  characteristics  of  fiscal 
policy  have  also  developed.  These  have  been  outlined  by 
Prof.  W.  M.  Daniels  in  a  way  which  cannot  be  improved 
upon,  and  they  are  repeated  here  to  portray  the  close 
relationship  which  exists  between  the  fiscal  activities  of 
governments  and  individuals.1 

The  first  characteristic  of  modern  fiscal  policy  is  that 
there  is  a  normal  and  calculable  field  of  government 
activity.  During  the  Great  War  government  expendi- 
tures mounted  to  unprecedented  and  almost  unbelievable 
heights,  which  seems  to  disprove  the  characteristic  just 
mentioned.  This,  however,  is  the  exception  which  helps 
to  prove  the  truth  of  the  statement.  In  the  modern  era 
wars,  with  their  large  and  incalculable  expenditures,  have 
represented  an  abnormal  state  of  society.  In  the  earlier 
stages  of  its  development,  however,  the  peaceful  pursuit 
of  industry  was  the  abnormal  course.  Under  normal  mod- 
ern conditions,  then,  the  citizen  can  pursue  his  occupation 
with  the  feeling  that  the  state  will  require  nothing  unusual 
of  him.  Modern  fiscal  science  has  become  so  exact,  in 
fact,  that  officials  are  able  to  predict  the  revenues  and 
expenditures  for  a  coming  year  to  within  a  fraction  of  one 
per  cent. 

1  W.  M.  Daniels,  Elements  of  Public  Finance,  p.  7. 


16  OUTLINES  OF  PUBLIC  FINANCE 

A  second  characteristic  is  the  periodic  exaction  of  money 
from  citizens  for  the  support  of  the  state.  Such  a  state- 
ment appears  axiomatic  in  the  extreme  to  the  citizens  of 
a  modern  political  unit.  In  a  following  chapter  the  de- 
velopment of  taxation  will  be  discussed,  and  it  will  be 
found  that  the  exaction  of  revenue  from  citizens  is  a  com- 
paratively recent  phenomenon.  Early  revenues  came 
from  other  sources  than  from  exactions  from  the  citizens. 
These  were  called  upon  only  in  case  of  extraordinary  need. 

The  third  characteristic,  the  necessity  for  which  has 
already  been  suggested,  is  the  popular  control  over  in- 
come and  expenditure.  The  growth  of  constitutionalism 
has  been  more  marked,  perhaps,  by  the  control  of  the 
property  owners  over  state  expenditures  than  by  any 
other  single  feature.  Many  constitutional  changes  have 
been  inaugurated  in  order  to  secure  this  control,  and  when 
once  secured  the  principle  has  always  been  closely  guarded. 
Some  modern  proposals  for  tax  reform,  which  will  be  dis- 
cussed later,  give  little  consideration  to  this  principle,  yet 
it  still  stands  at  the  top  of  the  requirements  for  safe  con- 
stitutional government. 

The  fourth  characteristic  given  by  Professor  Daniels  is 
the  universality  of  public  credit.  This  could  reach  a 
growth  of  any  appreciable  size  only  with  the  development 
of  constitutional  government.  The  probability  of  the 
repudiation  of  public  debts  decreased  in  proportion  to  the 
amount  of  control  which  the  public  gained  over  fiscal 
policies.  As  long  as  rulers  could  repudiate  the  debts  of 
the  state  at  will — and  this  was  frequently  one  of  the  first 
acts  of  a  new  ruler — public  credit  could  have  very  little 
stability.  With  a  condition  of  popular  government  the 
individual  is  lending  where  he  has  some  control  over 
payment,  and  he  will  take  every  possible  precaution  to 
prevent  officials  from  refusing  to  meet  the  state's  obli- 
gations. 

10.  The  Interest  in  Public  Finance  Is  Increasing.— 
Another  characteristic  of  the  new  era,  as  marked  as  those 


INTRODUCTION  17 

which  have  just  been  considered,  is  the  present  wide- 
spread interest  which  fiscal  considerations  have  succeeded 
in  arousing.  This  can  be  accounted  for  partially  by  the 
rapid  expansion  in  the  number  of  activities  which  the 
state  has  undertaken.  The  individual  has  kept  demand- 
ing that  the  state  increase  its  sphere  of  activities,  and  the 
supplying  of  these  demands  has  caused  expenditures  and 
revenues  to  mount  higher  and  higher.  There  are  few  who 
did  not  cringe  at  our  first  billion  dollar  Congress,  while  if 
such  a  small  amount  would  be  spent  by  Congress  in  any 
year  in  the  future,  the  event  would,  no  doubt,  be  looked 
upon  with  astonishment.  That  a  citizen  does  not  agree 
in  the  propriety  of  the  activities  of  the  government  should 
not  detract  from  his  interest  in  the  fiscal  aspect;  rather, 
this  very  situation  should  stimulate  a  greater  interest,  the 
result  of  which  would  be  to  demand  investigation,  reform, 
and,  if  necessary,  a  retrenchment  in  expenditures. 

As  concrete  evidence  of  the  interest  which  is  being 
shown  in  fiscal  subjects,  the  numerous  commissions  which 
are  working  in  the  field  furnish  examples.  A  majority  of 
our  states  have  tax  commissions,  while  the  Federal  gov- 
ernment has  directed  many  investigations  into  problems 
of  a  fiscal  nature.  The  numerous  reports  of  these  regular 
and  special  investigating  commissions  provide  some  of  the 
most  helpful  literature  in  the  field  of  Public  Finance. 
Another  evidence  of  this  rise  in  the  general  interest  is  the 
large  number  of  conferences  which  are  continually  being 
held  for  the  purpose  of  investigating  and  discussing  fiscal 
problems.  Neither  this  recent  literature  nor  the  delib- 
erations of  the  conferences  are  of  a  technical  nature,  but 
are  admirably  adapted  to  furnish  enlightenment  for  the 
average  citizen  on  the  expenditures  and  revenues  of  the 
various  political  units  to  the  support  of  which  he  is 
contributing. 

ii.  Public  Finance  May  Be  Studied  Under  Different 
Heads. — The  subject  of  public  revenues  has  always  been 
given  a  prominent  place  in  fiscal  discussions.  Early  Eng- 


18  OUTLINES  OF  PUBLIC  FINANCE 

lish  writers  gave  little  attention  to  any  other  part  of  the 
science.  Germany  is  the  only  country  which  can  be  said 
to  have  given  early  and  consistent  attention  to  the  entire 
subject  matter  of  Public  Finance.  The  lack  of  interest  in 
the  other  phases  than  revenue  can  be  partially  accounted 
for  by  the  laissez-faire  doctrine  which  dominated  England, 
France,  and  the  United  States.  Even  yet  there  has  been 
comparatively  little  study  of  any  field  but  revenues,  while 
this  is  largely  limited  to  a  study  of  taxation.  In  this  vol- 
ume, expenditures,  public  indebtedness,  and  the  adminis- 
tration of  public  funds  will  be  given  some  attention.  The 
major  part  of  the  space,  however,  will  be  devoted  to  pub- 
lic revenues. 

Expenditures  Important. — A  more  extensive  interest  is 
developing  in  regard  to  public  expenditures,  and  it  is 
highly  important  that  the  public  should  be  informed  as 
to  the  use  which  is  being  made  of  the  funds  which  it  has 
contributed.  Public  fiscal  officials  occupy  a  peculiar  posi- 
tion in  that  they  have  the  duty  and  opportunity  of  spend- 
ing funds,  the  burden  of  which  is  not  felt  by  themselves. 
Too  often  they  fail  to  consider  that  the  amounts  which 
they  demand  and  spend  might  have  been  used  to  better 
advantage  had  they  been  left  with  the  individuals  from 
whom  they  were  taken.  Public  expenditures,  moreover, 
may  frequently  be  made  for  objects  which  are  in  them- 
selves admirable,  but  which,  at  the  same  time,  impose 
too  heavy  a  burden  upon  the  citizens.  A  temptation 
always  exists  with  the  expenditure  of  funds  which  are  not 
one's  own,  and  this  temptation  tends  more  often  to  unwise 
and  extravagant  expenditure  than  to  parsimony.  The 
surest  means  of  control  lies  in  the  use  of  the  ballot,  and  it 
is  only  through  a  knowledge  of  how  and  where  expendi- 
tures are  made  that  this  can  be  intelligently  and  effec- 
tively used. 

In  the  work  of  this  volume,  the  first  consideration  will 
be  given  to  public  expenditures.  Their  growth  and  de- 
velopment will  be  noted,  as  well  as  the  change  in  the 


INTRODUCTION  19 

character  of  the  objects  for  which  public  funds  have  been 
used.  Explanations  of  their  enormous  increase  will  be 
attempted.  A  comparison  between  the  nature  of  public 
and  private  business  will  be  made,  as  well  as  a  comparison 
of  the  wants  which  the  individual  supplies  directly  for 
himself  and  those  for  which  he  makes  indirect  provision 
through  the  agency  of  the  state.  The  relative  increase  in 
our  Federal,  state,  and  local  expenditures  will  be  noted, 
and  some  explanations  of  the  increases  will  be  given. 
Various  classifications  of  expenditures  will  be  considered, 
while  particular  consideration  will  be  given  to  a  classifica- 
tion according  to  the  methods  of  conferring  benefits. 

Revenues  and  Indebtedness  Considered. — The  considera- 
tion of  public  revenues,  which  will  follow  that  of  expendi- 
tures, needs  no  justification,  since  such  consideration  has 
always  been  the  topic  of  paramount  importance  in  trea- 
tises on  fiscal  subjects.  The  needs  of  the  early  state  will 
be  taken  up,  and  some  attention  will  be  given  to  the  early 
attempts  to  classify  revenues.  Notice  will  be  made  of 
revenues  from  public  domains  and  public  industries,  in- 
cluding a  brief  discussion  of  the  public  land  policy  of  the 
United  States.  The  development  and  justification  of  the 
various  forms  of  taxes  used  by  the  different  governmental 
units  will  command  the  most  attention  in  the  discussion 
of  revenues. 

Less  space  will  be  devoted  to  the  indebtedness  of  states 
than  to  their  revenues.  The  problem  of  indebtedness, 
however,  is  one  of  primary  importance  in  present-day 
fiscal  systems,  because  this  method  of  securing  funds  is 
being  called  into  use  more  and  more  to  meet  ordinary 
needs  rather  than  the  extraordinary  ones,  which  were 
considered  in  earlier  times  the  only  legitimate  purposes 
for  borrowing.  The  enormous  debts  which  were  saddled 
upon  the  important  nations  of  the  world  by  the  Great 
War  make  a  study  of  this  phase  of  the  subject  all  the 
more  interesting  and  necessary.  Reasons  for  the  gradual 
increase  in  public  debts  will  be  noted,  together  with  some 


20  OUTLINES  OF  PUBLIC  FINANCE 

of  their  more  important  economic  effects.  The  methods 
of  securing  loans  and  canceling  indebtedness  will  be 
studied,  while  some  comparisons  of  the  indebtedness  of 
the  more  important  nations  will  be  made. 

The  Administration  of  Funds. — The  importance  of  the 
proper  administration  of  public  funds  has  but  recently 
received  general  recognition.  There  is  no  question,  how- 
ever, as  to  the  vital  significance  which  this  phase  of  Pub- 
lic Finance  presents  to  all  who  contribute  to  the  common 
fund  of  the  state.  The  temptations  with  which  public 
officials  are  surrounded  have  already  been  indicated,  and 
it  is  imperative  that  temptation  be  removed  as  far  as 
possible,  while  the  consequences  for  yielding  to  tempta- 
tions should  be  felt  severely  by  those  who  are  guilty. 
These  results  can  be  accomplished  only  through  strict 
administrative  measures.  In  the  treatment  of  this  phase 
of  the  work  some  attention  will  be  given  to  the  develop- 
ment of  fiscal  control,  while  particular  attention  will  be 
given  to  the  budget — its  meaning,  preparation,  handling, 
and  use,  both  abroad  and  in  the  United  States.  The 
handling  of  the  public  accounts  will  also  receive  con- 
sideration. 

Because  of  the  present  interest  in  emergency  or  war 
financiering,  and  because  of  the  administrative  problems 
involved,  some  discussion  will  be  devoted  to  this  phase  of 
fiscal  problems.  Some  of  the  merits  and  defects  of  the 
possible  methods  for  financing  a  war  will  be  presented, 
together  with  the  methods  which  were  used  by  the  impor- 
tant belligerent  countries.  An  attempt  will  also  be  made 
to  show  what  a  tremendous  cost  war  has  been  to  the 
nations  of  the  world  and  to  the  United  States  in  particu- 
lar. Some  of  the  more  modern  fiscal  problems  will  receive 
brief  consideration. 

12.  Supplementary  Reading  Should  Be  Followed. — It 
is  not  intended  to  give,  in  the  following  pages,  an  exhaus- 
tive treatment  of  all  the  subjects  which  will  be  brought 
into  review.  It  is  hoped  that  the  student  may  become  so 


INTRODUCTION  21 

interested  as  to  desire  to  fill  in,  more  in  detail,  the  outlines 
of  the  important  fiscal  problems  which  will  be  taken  up. 
Where  works  exist  which  deal  concretely  with  the  subject 
matter  of  particular  chapters,  notation  will  be  made  of 
them  at  the  end  of  the  chapter.  Only  two  or  three  of  the 
better  ones  will  be  given  in  each  case. 

The  student  should  keep  in  touch  with  the  general 
treatises  on  Public  Finance  as  well  as  the  numerous  mod- 
ern publications  on  fiscal  problems.  The  works  which  are 
available  in  English,  of  a  general  nature,  to  which  con- 
stant reference  should  be  made,  and  which  will  not  be 
noted  at  the  end  of  the  chapters  because  of  their  general 
applicability  to  nearly  every  chapter,  are  the  following: 

H.  C.  Adams,  The  Science  of  Finance. 

C.  F.  Bastable,  Public  Finance  (third  edition). 

C.  J.  Bullock,  Readings  in  Public  Finance  (second  edi- 
tion) . 

G.  Cohn,  The  Science  of  Finance. 

W.  M.  Daniels,  The  Elements  of  Public  Finance. 

C.  C.  Plehn,  Introduction  to  Public  Finance  (fourth 
edition). 

D.  A.  Wells,  Theory  and  Practice  of  Taxation. 


CHAPTER   II 

CHARACTERISTICS   OF    PUBLIC    EXPENDITURES 

13.  Revenue  Has  Received  More  Study  than  Expend- 
itures.— Only  recently  do  we  find  fiscal  students  turning 
serious  attention  to  the  problems  of  public  expenditure. 
Comparatively  little  literature  can  be  found  dealing  with 
this  phase  of  Public  Finance,  while  volumes  have  been 
written  on  methods  for  securing  revenue.    The  reason  for 
this  condition  is  not  far  to  seek.    The  exaction  of  revenue 
has  been  considered  an  evil  to  be  minimized  as  much  as 
possible,  and  one  which  comes  much  nearer  home  to  the 
general  public  than  does  the  expenditure  of  funds  once 
secured.     We  have  had,  then,  numerous  studies  in  tax 
reform,  with  little  thought  as  to  needed  changes  in  the 
way  funds  have  been  spent.    It  is  impossible,  however,  to 
segregate  the  two  fields.     If  funds  are  squandered  and 
wasted,  the  best  possible  revenue  system  cannot  give 
satisfactory  results.    The  increasing  tax  burden  has  led 
the  public  to  inquire  what  is  to  be  given  in  return  for 
its  sacrifice  of  funds.     This  growing  burden  has  led  to 
a  demand  for  reform  in  revenue  laws.    A  further  recent 
demand  is  that  the  administration  of  public  funds  be 
handled  in  an  efficient  manner.    These  awakenings  of  the 
public  account  for  the  modern  interest  in  other  than  the 
revenue  phase  of  Public  Finance.    Henceforth,  no  doubt, 
a  much  larger  proportion  of  our  fiscal  literature  will  deal 
with  the  expenditure  and  the  administration  of  public 
funds. 

14.  Early  Writers  Did  Not  Entirely  Neglect  Public  Ex- 
penditure^,— Widespread  interest  in  public  expenditure 


CHARACTERISTICS  OF  PUBLIC  EXPENDITURES    23 

belongs  to  modern  times,  yet  we  do  not  find  its  importance 
entirely  ignored,,  even  at  the  beginning  of  the  study  of 
fiscal  problems.  Carafa,  the  statesman  of  Naples,  near 
the  end  of  the  fourteenth  century,  became  concerned 
about  the  expenditure  of  the  kingdom.  He  made  three 
important  classes  of  the  purposes  for  which  public  funds 
were  used:  (1)  for  the  defense  of  the  nation;  (2)  for  the 
support  of  the  ruler;  (3)  for  contingencies.  He  contended 
for  a  reserve  fund  to  meet  emergencies,  and  for  close 
official  supervision  of  the  public  accounts. 

Bodin,  the  first  important  French  student  of  fiscal 
problems,  wrote  in  the  latter  part  of  the  sixteenth  cen- 
tury, and  contended  that  the  public  funds  should  be  used 
for  the  honor  of  the  state.  He  recommended,  further- 
more, that  an  annual  statement  be  made  which  would 
show  the  condition  of  the  state's  finances.  His  classifica- 
tion of  expenditure  was  somewhat  more  definite  than  that 
of  Carafa,  and  included  provisions  for  the  care  of  the 
poor  as  well  as  for  improvements. 

Sir  William  Petty,  near  the  middle  of  the  seventeenth 
century — the  first  English  fiscal  writer  of  note — gave  a 
rather  detailed  classification  of  the  important  needs  for 
public  funds.  It  will  be  interesting  to  compare  the  rela- 
tive importance  of  the  items  in  his  list  with  a  modern  list 
of  expenditures,  which  will  be  given  later.1  His  classes  of 
expenditures  were  for:  (1)  defense;  (2)  maintaining  the 
government;  (3)  religion;  (4)  education;  (5)  orphans; 
(6)  public  works.  Yet,  notwithstanding  the  consideration 
which  fell  to  expenditure,  revenue  systems  received  the 
major  portion  of  the  early  study  and  investigation. 

15.  Early  Systems  of  Expenditure  Were  Simple. — The 
methods  of  expenditure  which  developed  in  the  early 
state  can  scarcely  be  called  systematic,  because  the  ex- 
penditures were  made  in  a  more  or  less  haphazard  fashion. 
The  state,  in  its  early  stages  of  development,  was  subor- 
dinate to  the  family  unit,  where  most  of  the  personal 

1See  p.  31. 


24  OUTLINES  OF  PUBLIC  FINANCE 

needs  were  supplied.  As  the  power  of  the  state  strength- 
ened, more  demands  were  made  upon  it.  The  first  dis- 
tinct public  treasury  in  the  different  states  was  usually 
for  religious  purposes.  There  were  no  expenditures  for 
protection,  as  the  citizens  protected  the  state.  In  foreign 
wars  the  citizens  furnished  their  own  weapons  and  were 
paid  by  the  spoils  of  conquest. 

Expenditures  of  Greece  and  Rome. — The  most  lavish 
of  early  public  expenditure  was  found,  perhaps,  in  Athens. 
Large  public  buildings  were  erected,  and  huge  sums  were 
spent  on  public  works  of  various  kinds.  Expenditures  for 
religious  fetes  were  often  wasteful  and  extravagant.  An 
interesting  feature  of  early  Athenian  expenditure  is  that 
comparatively  large  sums  were  spent  on  the  poor  and  on 
war  orphans. 

In  Rome,  likewise,  large  sums  were  spent  for  religion, 
while  the  maintenance  of  the  government,  the  erection  of 
public  buildings,  and  the  construction  of  roads  were  items 
of  primary  importance.  Provision  was  made  for  poor 
classes,  and  various  kinds  of  public  charities  were  estab- 
lished. The  system  of  expenditures  in  Rome  displayed 
more  development  than  did  that  in  Athens,  since  here 
many  citizens  who  were  rendering  services  to  the  state 
were  receiving  a  direct  payment  from  the  state.  This 
development  had  gone  so  far,  before  the  fall  of  the  Empire, 
that  the  soldiers  were  on  the  pay  roll  of  the  government. 

Expenditures  Under  Feudalism. — Under  feudalism,  a 
study  of  the  expenditures  would  be  a  study  of  the  ex- 
penditures of  the  prince.  He  was  the  owner  of  the  lands 
whence  came  the  revenues.  The  public  duties  performed 
by  the  officials  were  usually  few,  and  these  were  performed 
most  often  when  a  private  benefit  was  entailed.  Feudalism 
presented  a  system  in  which  the  public  expenditure  was 
primarily  in  the  interest  of  the  ruler.  If  his  interests  coin- 
cided with  the  interests  of  the  public,  then  only  did  the 
public  benefit  from  the  expenditures  of  the  government. 
As  constitutionalism  grew,  and  as  the  public  gained  a 


CHARACTERISTICS  OF  PUBLIC  EXPENDITURES    25 

voice  in  the  government,  this  situation  became  radically 
changed. 

1 6.  The  Nature  of  Public  Expenditure  Differs  from 
Private  Expenditure. — The  expenditure  of  a  state  is  sim- 
ilar to  that  of  an  individual  in  that  both  have  to  do  with 
the  giving  up  of  money.  The  principles  which  underlie 
these  expenditures,  however,  are  somewhat  different. 
Eheberg,  a  German  writer,  has  pointed  out  these  differ- 
ences under  five  heads,  as  follows:  (1)  the  ends  sought  by 
the  state  reach  far  beyond  the  sphere  of  individual  ac- 
tivity; (2)  in  private  business  the  ruling  principle  is 
special  service  and  special  payment;  (3)  the  state  cannot 
compare  the  cost  of  the  service  with  the  value  of  the 
product — a  necessary  feature  in  private  business;  (4)  a 
state  can  undertake  enterprises  of  unlimited  duration, 
which  individuals  would  not;  (5)  the  income  of  the  state 
is  measured  by  its  needs,  while  the  expenditure  of  the 
individual  is  limited  by  his  income.1 

Some  exceptions,  of  course,  are  found  to  these  generali- 
zations, but  as  a  whole  they  indicate  fundamental  differ- 
ences in  state  and  individual  activity.  In  these  days  of 
huge  combinations  of  capital,  the  sphere  open  to  individ- 
ual enterprise  has  materially  widened.  Yet  there  remains 
to  the  state  enterprises  of  a  nature  that  individuals  do 
not  care  to  enter.  No  individual  cares  to  undertake  the 
task  of  supplying  all  the  needed  services  of  an  immaterial 
nature  the  value  of  which  cannot  be  measured.  Exam- 
ples of  this  would  be  army,  navy,  and  police  protection, 
establishment  of  systems  of  courts  for  maintaining  jus- 
tice, and  the  maintenance  of  public  parks  and  libraries. 
Even  the  magnitude  of  enterprises  like  the  Panama  Canal 
would  still  have  a  deterrent  effect  on  private  undertaking. 

Returns  on  Investment. — The  state  is  not  so  much  con- 
cerned about  a  special  payment  for  a  special  service  as  is 
the  individual,  neither  is  it  so  concerned  about  a  compari- 

irThis  passage  from  Eheberg  is  quoted  in  Bullock's  Readings  in  Public 
Finance,  p.  19. 


20  OUTLINES  OF  PUBLIC  FIXAXCE 

son  between  cost  of  production  and  value  of  product. 
This  is  because  the  state  does  not  depend  to  any  appre- 
ciable extent  upon  its  enterprises  for  its  income.  The 
individual  cannot  continue  to  sell  the  products  of  indu 
for  less  than  the  cost  of  production.  The  value  of  many 
of  the  products  of  the  state,  on  the  other  hand,  does  not 
permit  of  financial  measurement.  Who  would  ventur 
value  the  return  from  the  millions  of  dollars  expended 
annually  on  education,  on  the  judicial  system,  or  on  our 
eleemosynary  institutions?  In  a  broad  way  the  mot  i  vat  ing 
force  of  private  business  is  profit,  which  necessitates  pay- 
ments for  senices  and  a  selling  for  more  than  cost  of 
production.  The  motivating  force  of  the  state's  activity, 
in  general,  is  service,  the  value  of  which  often  cannot  be 
measured,  and  for  which  no  direct  payment  is  asked. 

The  individual  is  concerned,  ordinarily,  in  quick  returns 
on  his  investment.  Few  individuals  would  undertake  an 
enterprise,  no  matter  how  much  in  public  demand,  if  no 
returns  could  be  had  for  twenty,  thirty,  or  forty  years. 
The  state  may  often  make  expenditures  on  the  basis  of 
distant  future  returns  as  well  as  on  present  returns. 
Where  the  element  of  future  service  is  large,  the  state  may 
justly  borrow  funds  for  the  enterprise,  and  require  the 
future  generations  that  enjoy  the  sen-ice  to  repay  the 
loan.  While  the  state  is  a  continuing  entity,  the  individ- 
ual lives  only  in  one  generation,  and  he  is  primarily  con- 
cerned with  enterprises  the  fruition  of  which  is  not  in 
the  distant  future, 

Measure  cf  State's  Income.— The  statement  that  a  str. 
income  is  measured  by  its  expenditure  must  be  hedged 
with  proper  qualifications.    While  it  is  true  that  the  state 
has  the  resources  of  its  citizens  upon  which  to  draw, 
these  resources  are  not  infinite,  and  thought  must  be  had 
for  future  as  well  as  for  present  revenues.    It  would  be  as 
destructive  a  fiscal  policy  to  use  up,  for  present  revenue, 
the  sources  capable  of  supplying  a  continuous  stream  of 
funds,  as  it  would  be  to  cut  down  a  tree  to  get  the  fruit. 


CHARACTERISTICS  OF  PUBLIC  EXPENDITURES    27 

Fiscal  officials  should  be  concerned  about  the  continued 
existence  of  the  state,  and  should  not  so  act  in  the  present 
as  to  impair  the  future.  While  expenditure  which  en- 
croaches upon  the  source  of  revenue  is  to  be  avoided, 
parsimony  on  the  part  of  officials  should  also  be  looked 
upon  as  undesirable.  Officials  have  sometimes  curtailed 
expenditures  far  more  than  the  healthy  development  of 
the  state  would  justify,  in  order  to  make  a  good  showing 
to  their  constituency. 

Political  Restraint. — Another  important  limitation  upon 
a  state's  revenue  is  the  existing  political  restraints.  The 
form  of  government  and  customs  which  have  come  down 
from  the  past  must  be  considered.  The  same  fiscal  sys- 
tem would  not  succeed  in  a  monarchical  state  as  in  an 
extreme  democracy.  The  political  restraints  established 
by  constitutions  and  legislatures  must,  of  course,  be  ob- 
served. Export  duties,  graduated  excise  taxes,  or  other 
than  apportioned  direct  taxes,  could  not  be  used  by  our 
Federal  government  because  they  are  prohibited  by  the 
Constitution.  A  number  of  the  state  constitutions  con- 
tain what  is  known  as  the  "uniform  assessment"  of  prop- 
erty clause,  which  provides  that  all  property  is  to  be  as- 
d  at  the  same  rate.  Frequently  tax  limitation  laws 

t  which  place  a  maximum  on  the  amount  of  revenue 
political  units  may  collect.  Evidently,  then,  fiscal  officials 
do  not  have  absolutely  a  free  hand  in  securing  funds,  but 
must  be  concerned  about  future  needs  of  the  state,  and 
be  governed  by  existing  political  institutions  and  laws. 

17.  The  Nature  of  Expenditures  Has  Changed  with 
Changes  in  Forms  of  Government. — It  has  been  noted 
that  in  the  feudal  regime  the  expenditures  of  the  state 
were  the  expenditures  of  the  ruler.  This  was  largely  true 
in  all  governments  before  constitutionalism  began  to  grow. 
An  important  factor  which  marked  the  growth  of  the 
constitutional  form  of  government  was  the  increasing 
control  which  the  public  gained  over  the  purse  strings. 

.lually  the  expenditures  of  the  ruler  were  curtailed. 


28  OUTLINES  OF  PUBLIC  FINANCE 

These  had  been  primarily  for  his  own  desires,  and  were 
for  the  good  of  the  state  only  if  his  desires  coincided  with 
the  welfare  of  the  state.  Expenditures  now  became  justi- 
fied only  when  they  were  primarily  for  the  welfare  of  the 
public.  This  change  in  the  nature  of  the  control  of  ex- 
penditures has  taken  definite  form  in  the  constitutions  of 
many  democratic  countries.  In  the  United  States,  for 
example,  bills  for  raising  revenue  must  originate  in  the 
House  of  Representatives — that  branch  of  the  legislature 
which  was  directly  elected  by  the  people  at  the  adoption 
of  the  Constitution. 

Growth  of  Public  Credit. — The  growth  of  public  control 
over  revenues  has  also  done  much  to  strengthen  public 
credit.  In  the  earlier  states  it  was  an  ordinary  occurrence 
for  the  ruler  to  pile  up  heavy  debts;  and  repudiation,  in 
whole  or  in  part,  was  just  as  common.  It  was  the  regular 
practice  for  a  new  ruler  to  repudiate  the  debts  of  his 
predecessor.  Under  such  conditions  the  institution  of 
public  credit  was  indeed  weak.  As  soon  as  the  citizens 
began  to  gain  control  they  began  to  strengthen  the  credit 
system.  Since  the  citizens  were  the  lenders,  repudiation 
was  their  loss,  and  it  is  easily  understood  why  repudiation 
of  state  debts  has  not  been  a  practice  under  constitutional 
government. 

18.  The  Universal  Tendency  of  Public  Expenditures 
Has  Been  to  Increase. — At  the  close  of  the  eighteenth 
century  it  was  generally  believed  that  the  previous  rise 
in  expenditures  would  cease,  and  a  gradual  lowering  was 
even  expected  and  hoped  for.  That  period  marked  the 
overthrow  of  the  old  monarchical  regime,  with  its  lavish 
expenditures  for  the  courts  of  the  rulers.  The  introduc- 
tion of  constitutionalism  was  expected  to  materially  lessen 
the  cost  of  military  support,  which  had  been  mounting 
rapidly,  and  which  had  become  particularly  burdensome. 
It  was  considered,  too,  that  the  citizenship,  which  at  that 
time  was  almost  entirely  agricultural,  must  necessarily  be 
freed  from  some  of  the  tax  burdens  they  had  been  attempt- 


CHARACTERISTICS  OF  PUBLIC  EXPENDITURES    29 

ing  to  bear,  in  order  that  they  could  again  secure  a  foot- 
hold and  provide  the  necessary  increase  in  production. 

_The old  mercantilist^  idea  of  government  was  rapidly 

\    /losing  ground,  and  the  laissez-faire  policy  was  being  sub- 

V  stituted.    That  government  which  governed  least  was,  in 

the  future,  to  be  considered  best,  and  this  would  entail 

the   retraction   rather   than   expansion   of   government 

activities. 

This  line  of  reasoning,  however,  proved  ill  founded,  and 
public  expenditures  have  continued  to  increase.  While 
government  activities  decreased  in  some  lines,  the  result- 
ing decrease  in  expenditure  was  more  than  offset  by  ex- 
penditures for  increased  activity  in  new  lines  of  enter- 
prise. Commerce  and  industry  soon  took  ranks  of  im- 
portance with  agriculture,  and  more  revenue  could  easily 
be  secured  with  no  increase  in  burden.  All  this  was  an 
impetus  to  an  extended  activity  on  the  part  of  the  state. 
It  will  be  profitable  to  note  some  of  the  aspects  of  the 
continual  increase  in  public  expenditures. 

19.  Increase  in  Public  Expenditures  Is  Not  Confined 
to  Any  Political  Unit. — Some  conclusions  from  the  study 
of  statistical  data  will  show  that  the  increase  in  public 
expenditures  has  indeed  been  general — that  the  increase 
has  not  been  confined  to  autocracy  or  democracy,  or  to 
Federal,  commonwealth,  or  city  units.  In  the  European 
states  expenditures  increased  about  360  per  cent  for  the 
sixty-year  period  following  1830,  while  the  per  capita  in- 
crease for  the  same  time  was  about  400  per  cent.  In  the 
same  period  the  expenditures  of  France  increased  more 
than  225  per  cent,  while  England's  expenditures  were 
nearly  110  per  cent  greater  in  1902  than  in  1866.  In 
twenty-seven  years  after  1874  German  expenditures  had 
increased  something  like  225  per  cent,  while  Russian  ex- 
penditures showed  an  increase  of  125  per  cent  for  the 
twenty-year  period  after  1800. 

Expenditures  of  smaller  European  states  show  the  same 
upward  trend,  as  is  illustrated  by  Belgium  and  Switzer- 


30  OUTLINES  OF  PUBLIC  FINANCE 

land.  The  increase  in  Belgium  for  less  than  a  fifty-year 
period  after  1850  was  about  380  per  cent,  while  in  the 
Swiss  Federation,  for  the  same  period,  the  increase  wa? 
nearly  1,600  per  cent.1 

The  increase  in  some  of  the  countries  can  be  attributed 
partially  to  wars,  yet  the  countries  which  have  been  less 
engaged  in  war  have  shown  the  most  rapid  increase  in 
expenditure.  The  conditions  in  Belgium  and  Switzerland 
are  examples  of  this  situation.  The  expenditures  of  the 
political  subdivisions  of  European  states  have  increased, 
sometimes  even  more  rapidly  than  those  for  the  states. 
Expenditures  for  the  last  few  years  show,  of  course,  an 
enormous  increase,  but  they  are  so  influenced  by  the  Great 
War  as  to  give  no  comparison  with  normal  increases. 

20.  Expenditures  in  the  United  States  Show  an  Up- 
ward Trend. — A  study  of  expenditures  of  the  United 
States  and  its  political  units  will  show  that  everywhere 
there  has  been  an  increase.  After  a  period  of  war,  or  some 
other  emergency  expenditure,  there  may  be  periods  in 
which  decreases  can  be  found,  but  they  never  get  back 
to  the  pre-emergency  basis.  A  somewhat  detailed  study 
of  the  expenditures  of  the  United  States,  and  its  political 
divisions,  will  be  of  interest  to  American  students  of  Pub- 
lic Finance.  In  most  of  the  following  tables  the  items  are 
given  for  which  expenditures  have  been  made,  so  that 
comparisons  may  be  made  between  increases  in  the  ex- 
penditures for  particular  items  as  well  as  between  the 
total  expenditures.  Emergency  expenditures  show  a 
greater  effect  upon  the  figures  for  the  Federal  government 
than  upon  those  for  the  other  political  divisions.  The 
following  are  expenditures  of  the  Federal  government:2 

1  These  illustrations  of  the  increase  of  public  expenditures  are  taken 
from  a  treatment  of  this  subject  by  F.  S.  Nitti.    An  extract  of  his  work 
may  be  found  in  Bullock's  Readings  in  Public  Finance,  p.  32. 

2  A  detailed  account  of  the  growth  of  expenditures  in  the  United  States 
may  be  found  in  an  article  by  C.  J.  Bullock,  in  the  Political  Science  Quar- 
terly, xviii,  p.  97.    The  expenditures  for  each  year  may  be  secured  from 
Cables  given  in  Pewey's  Financial  History  of  the  United 


CHARACTERISTICS  OF  PUBLIC  EXPENDITURES    31 


Year 

Total 

Per  Capita 

Year 

Total 

Per  Capita 

1850 

1860 
1870 

1886 

$  40,947,000 
63,200,000 
293,656,000 
242,483,000 

$1.76 
2.01 

7.601 
4.222 

1915 
1916 
1917 
1918 

$1,047,835,000 
1,048,225,000 
2,405,932,000 
9,312,169,000 

$10.44 

10.36 
25.04 
89.16 

1  In  currency  value;  gold  would  be  about  $6.80. 

2  Lowest  since  Civil  War. 

From  this  table  it  will  be  seen  that  there  has  been  a 
gradual  increase  in  the  Federal  expenditures,  with  a  sud- 
den increase  at  the  time  of  the  Civil  War  and  the  Great 
War.  After  the  Civil  War  there  was  a  gradual  decrease, 
and  we  may  expect  the  same  tendency  for  the  next  few- 
years.  It  is  unlikely  that  the  amount  will  ever  be  as 
small  as  it  was  in  1913  or  1914.  The  following  table 
shows  the  increase  in  Federal  expenditures  for  particular 
items  from  1903  to  1913 :J 

EXPENDITURES  OF  THE  NATIONAL  GOVERNMENT 


1913 

1903 

General  Government  
Protection  to  Person  and  Property.  . 
Health  and  Sanitation  

$  61,784,000 
264,671,000 
5,701,000 

$  59,924,000 
175,875,000 
2,533,000 

Highwavs  

42,652,000 

19,590,000 

Charities,  Hospitals,  and  Corrections 
Education     .        .        

182,313,000 
17,243,000 

146,918,000 
10,341,000 

Recreation  

924,000 

505,000 

Miscellaneous 

13  373  000 

12  850  000 

Apportionments                     

10,108,000 

5,647,000 

Public  Service  Enterprises  

264,107,000 

137,695,000 

Interest 

25  256  000 

28  556,000 

Outlays  l  

64,380,000 

16,564,000 

1  Outlays  are  such  expenditures  as  those  for  public  buildings,  etc. 

Some  of  the  items  in  this  table  may  be  a  little  out  of 
proportion  because  of  some  particular  undertaking  in  one 
of  these  years.  For  example,  a  part  of  the  expenditure  for 

1  The  statistical  compilations  in  this  chapter,  unless  otherwise  indicated, 
have  been  made  from  the  following  reports  of  the  Bureau  of  the  Census: 
Wealth,  Debt,  and  Taxation;  Financial  Statistics  of  States;  and  Financial 
Statistics  of  Cities.  The  figures  may  not  be  entirely  accurate,  yet  they 
are  sufficiently  so  to  give  general  comparisons,  the  purpose  for  which  they 
fire  intended. 


32 


OUTLINES  OF  PUBLIC  FINANCE 


public  service  enterprises  in  1913  was  for  the  Panama 
Canal.  In  general,  however,  the  table  presents  the  usual 
trend  in  the  growth  of  Federal  expenditures  in  a  period 
when  war  had  very  little  influence.  In  some  items  the 
percentage  of  increase  has  been  small,  while  in  others  it 
has  been  much  larger.  Some  reasons  for  this  will  be 
noted  later.  In  only  one  item — interest — was  there  a 
decrease.  Because  of  the  indebtedness  which  the  Great 
War  brought  into  existence,  this  is,  of  course,  larger  now 
than  ever  before. 

Expenditures  of  States  and  Cities. — A  comparison  of  the 
expenditures  of  states  and  cities  will  show  the  same  tend- 
ency to  increase  as  is  seen  in  those  of  the  Federal  govern- 
ment. The  following  table  shows  this  for  recent  years: 


Year 

States 
Total 

Per 
Capita 

Year 

Cities  Over  30,000 
Total 

Per 
Capita 

1915 
1916 
1917 
1918 

$490,708,000 
505,399,000 
513,063,000 
561,000,000 

$4.99 
5.05 
5.04 
5.42 

1915 
1916 
1917 
1918 

$1,057,127,000 
1,043,594,000 
1,081,866,000 
1,144,630,000 

$33.92 
32.34 
32.53 
33.35 

This  table  shows  for  the  four  years  indicated  that  there 
has  been  a  gradual  increase  in  both  state  and  city  expend- 
itures. The  following  gives  more  in  detail  the  increases 
in  state  expenditures  from  1903  to  1913  and  1918: 

EXPENDITURES  OF  STATES  (000  OMITTED) 


1918 

1913 

1903 

Total 

Per 
Cap- 
ita 

Total 

Per 
Cap- 
ita 

Total 

Per 
Cap- 
ita 

General  Government. 

$51,395 

$0.59 

$40,496 

$0.42 

$25,897 

$0  32 

Protection  to  Person  and 
Property  

33,218 

0.32 

24,926 

0.26 

6,804 

0.08 

Health  and  Sanitation.  .  .  . 
Highways  

12,249 
38,829 

0.12 
0.38 

6,387 
16,884 

0.07 
0  17 

5,327 
4,680 

0.07 
0.06 

118,084 

1.14 

87,306 

0.90 

52,515 

0.65 

Schools 

163,183 

1.58 

132,575 

1  37 

64,643 

0.80 

Recreation  

1,248 

0.01 

1,983 

0.02 

1,563 

0.02 

CHARACTERISTICS  OF  PUBLIC  EXPENDITURES    33 

It  is  seen  by  these  figures  that  state  expenses  have  been 
on  the  increase,  and  at  a  faster  rate  than  the  population. 
The  increase  in  population  from  1903  to  1913  was  about 
20  per  cent,  while  expenditures  increased  about  110  per 
cent.  The  increase  has  been  more  marked  in  some  fields 
than  in  others,  the  most  noticeable  being  in  protection  to 
person  and  property,  charities,  and  schools.  Some  ab- 
normalities may  be  found  in  tables  for  particular  years. 
A  decrease  in  expenditures  for  schools  may  appear,  for 
example,  while  expenditures  for  charities  may  take  the 
rank  of  first  importance  for  this  same  year. 

Comparative  statistics  of  incorporated  places,  in  so  far 
as  they  are  available,  show  exactly  the  same  trend  of  ex- 
penditure— upward.  Not  only  is  this  true  of  cities  of 
small  population,  but  it  is  evident  in  the  increasing  cost 
of  government  as  cities  become  larger.  A  study  of  the 
following  table  is  interesting,  not  only  from  the  stand- 
point of  increasing  expenditure  as  population  increases, 
but  also  from  the  standpoint  of  the  relative  importance  of 
the  various  classes  of  expenditure,  which  will  be  treated 
in  the  following  chapter. 

It  is  seen  that,  with  practically  no  exception,  after  a 
city  has  reached  a  population  of  50,000,  a  further  growth 
in  size  necessitates  a  greater  per  capita  increase  in  every 
line  of  its  activity.  When  compared  with  preceding 
tables,  the  magnitude  of  city  expenditures  is  evident. 
The  corresponding  burden  on  property  is  so  great  that  a 
comparatively  small  number  of  urban  citizens  can  afford 
to  be  property  owners.  The  financial  advantages  of  living 
just  outside  the  corporation  limits,  yet  enjoying  much 
that  the  city  has  to  offer,  are  quite  evident  when,  in  1913, 
the  total  per  capita  expenditure  of  counties  was  $4.49, 
while  for  146  cities  it  was  $32.46. 

21.  Increasing  Expenditures  Cannot  Be  Considered 
Apart  from  Other  Factors. — If  the  enormous  increases  in 
public  expenditure  in  all  our  governmental  bodies  had  to 
be  borne,  with  no  change  in  the  ability  of  individuals  to 


34 


OUTLINES  OF  PUBLIC  FINANCE 


g§ 


00 


8 


8 


8 


CO 


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I  I 


o       o       o 

4»         £»         45 

8"    8"    S 


CHARACTERISTICS  OF  PUBLIC  EXPENDITURES    35 

bear  the  increasing  burdens,  there  would  be  cause  for 
grave  alarm.  Had  it  been  true,  however,  that  this  ability 
were  stationary,  expenditures  would  not  have  reached 
their  present  magnitude,  for  the  tree  would  have  been  cut 
to  get  the  fruit  long  ago.  But  the  facts  that  population  is 
increasing,  and  that  wealth — the  source  of  revenue — has 
also  been  increasing,  must  be  taken  into  account.  In 
Europe,  it  was  seen,  population  was  increasing  less  rapidly 
than  expenditure,  which,  of  course,  causes  an  increase  in 
the  individual  burden. 

Expenditures  in  the  United  States. — In  the  United  States 
the  increase  in  population  has  more  nearly  kept  pace  with 
the  increase  in  expenditures,  while  the  increase  in  wealth 
has  surpassed  the  growth  of  expenditures.  This  means 
that,  in  spite  of  the  great  increase  in  state  activity,  the 
individual  burden  has  decreased.  A  lower  percentage  of 
the  national  wealth  was  spent  by  governmental  units  in 
1916  than  in  1870.  In  1850  our  national  wealth  was  esti- 
mated at  about  $7,000,000,000,  while  in  1912  it  had  in- 
creased to  more  than  $175,000,000,000.  In  1870  the  Fed- 
eral government  spent  about  $13.2  per  $1,000  of  national 
wealth;  in  1912  the  expenditure  per  $1,000  of  wealth  was 
$5.3.  The  per  capita  change  in  expenditure  from  1903  to 
1913  was  from  $7.90  to  $10.15.  All  other  governmental 
units  spent  $15.2  per  $1,000  of  the  wealth  in  1890,  while 
in  1912  the  expenditure  was  but  $13.3.  The  state  govern- 
ments spent,  in  1903,  $2.30  per  capita,  and  $3.95  in  1913. 
The  rise  in  the  per  capita  expenditure  for  146  cities  for 
the  same  period  was  from  $24.64  to  $32.46. 

In  the  United  States  as  a  whole,  because  of  the  increase 
in  population  and  wealth,  public  burdens  have  not  been 
increasing  faster  than  the  ability  to  bear  them.  This  has 
not  been  true,  perhaps,  of  some  of  the  political  divisions, 
especially  the  cities,  where  the  enormous  increase  in  ex- 
penditure has  outdistanced  the  increase  in  wealth.  This 
burden  may  be  particularly  heavy  upon  certain  classes  of 
citizens,  for  it  is  a  matter  of  common  knowledge  that  all 


36  OUTLINES  OF  PUBLIC  FINANCE 

property  owners  do  not  share  the  public  burden  in  pro- 
portion to  their  wealth.  Since  the  wealth  of  individuals 
in  general  is  increasing  at  a  greater  rate  than  government 
expenditures,  there  is  no  cause  for  the  fear  that  increasing 
government  activity  is  crushing  the  individual.  It  would 
further  indicate  that  there  is  no  pressing  need  for  new 
sources  of  revenue  so  far  as  securing  funds  is  concerned, 
no  matter  how  imperative  they  may  be  to  secure  a  more 
just  distribution  of  the  fiscal  burden. 

The  Value  of  Money. — When  attempts  are  made  to  com- 
pare the  increased  services  which  come  from  increased  ex- 
penditure, it  must  always  be  kept  in  mind  that  the  value 
of  money  is  not  constant.  For  a  number  of  years  following 
1873  increased  services  might  have  been  given  with  de- 
creased expenditures,  because  prices  were  falling  and  an 
expenditure  in  dollars  would  give  more  services  than 
before.  Since  the  late  'nineties,  however,  the  other  aspect 
has  been  true,  especially  since  the  advent  of  the  Great 
War.  In  so  far  as  a  state  is  a  purchaser  of  materials  in 
the  open  market,  it  is  affected  by  rising  prices  as  much 
as  an  individual.  On  the  whole,  however,  the  effect  is 
less  marked  in  the  case  of  the  state,  because  a  larger 
proportion  of  its  expenditures  is  for  salaries  and  wages, 
which  rise  much  slower  than  other  prices.  Because  of 
rising  prices,  then,  expenditures  may  noticeably  increase, 
while  the  services  rendered  may  remain  the  same  or 
decrease. 

Expenditures  for  War. — The  proportion  of  public  ex- 
penditure which  is  due  directly  or  indirectly  to  war  is  an 
item  of  importance.  Everyone  is  aware  that  during  the 
Great  War  all  other  expenditures  were  overshadowed  by 
those  for  war.  In  a  few  years,  however,  it  may  be  for- 
gotten that  indirectly  war  expenditures  still  form  a  large 
part  of  the  total  public  outlay.  Professor  Bullock  has 
calculated  the  percentage  of  Federal  expenditure  due  to 
war  for  a  number  of  years  between  1870  and  1902,  the  re- 
sults of  which  are  almost  startling.  The  costs  due  to  war, 


CHARACTERISTICS  OF  PUBLIC  EXPENDITURES    37 

he  considered,  were  for  the  army,  the  navy,  pensions,  and 
for  interest  on  the  debt  arising  from  war.  On  this  basis 
80.7  per  cent  of  the  Federal  expenditure  in  1870  was  due 
to  war;  74  per  cent  in  1880;  66.4  per  cent  in  1890;  68 
per  cent  in  1897;  72.4  per  cent  in  1900;  and  70.6  per  cent 
in  1902.1  A  somewhat  detailed  study  of  the  cost  of  war 
will  be  presented  in  a  later  chapter. 

22.  Many  Causes  Are  Responsible  for  the  Growth  of 
Public  Expenditures. — Many  factors  have  contributed  to 
the  rapid  and  continual  growth  in  public  expenditures. 
States  are  not  only  undertaking  new  activities,  but  are 
entering  into  former  activities  more  extensively,  or  are 
attempting  to  conduct  these  activities  more  effectively. 
The  mere  fact  that  population  is  becoming  more  dense 
has  caused  a  number  of  expenditures  to  increase.  On  the 
whole,  governments  are  institutions  of  increasing  cost — a 
large  part  of  the  services  cost  more  per  capita  as  popula- 
tion increases.  Reference  to  some  of  the  preceding  tables, 
especially  the  one  for  cities,  will  indicate  this  tendency. 

Army  and  Navy. — Military  and  naval  activities  have 
been  one  of  the  chief  causes  for  increase  in  Federal  ex- 
penditures. The  increase  has  been  general,  in  democratic 
as  well  as  in  autocratic  governments.  Wars  are,  of  course, 
much  less  frequent  than  formerly,  but  the  daily  cost  of  a 
war,  such  as  the  Great  War,  would  more  than  finance  an 
entire  conflict  in  earlier  times.  A  modern  twelve-inch  gun 
or  battleship  would  entail,  perhaps,  as  much  expenditure 
as  an  early  army  or  navy.  Another  important  factor  is 
the  maintenance  of  the  large,  modern  navy  and  standing 
army  in  times  of  peace.  This  means  that  peace-time 
equipment  represents  a  far  greater  expenditure  than  did 
early  wars.  A  review  of  the  table  on  Federal  expenditures 
will  show  the  importance  of  these  items  in  the  expendi- 
tures of  the  United  States. 

Public  Utilities,  Highways,  and  Education. — Among  the 
important  services  which  modern  governments  supply, 

1  Bullock,  Readings  in  Public  Finance,  p.  50. 


38  OUTLINES  OF  PUBLIC  FINANCE 

and  which  were  formerly  supplied  by  individuals,  are  the 
various  classes  of  public  service  enterprises,  highways, 
and  education.  Many  countries  have  gone  further  than 
the  United  States  in  supplying  the  services  of  public  utili- 
ties. In  some  countries  the  railroad,  telephone,  and  tele- 
graph are  operated  by  the  government,  while  these  are 
still  privately  operated  in  the  United  States.  Yet  the 
events  of  the  era  when  the  state  and  Federal  governments 
were  active  in  internal  improvements  are  familiar  to 
every  student  of  American  history.  The  demand  for  pub- 
lic ownership  seems  to  be  increasing,  and  the  number  of 
public  enterprises  is  rapidly  growing  larger.  This  is  espe- 
cially true  in  cities.  The  recent  emphasis  placed  upon 
education,  and  the  supplying  of  this  utility  by  the  public 
to  such  a  large  extent,  has  had  an  important  influence  in 
causing  expenditures  to  increase.  The  same  has  been 
true  with  highway  expenditures,  since  highways  are  no 
longer  supplied  by  individuals.  The  growth  and  relative 
importance  of  these  items  can  be  seen  by  reviewing  the 
preceding  tables  on  pages  32  and  34. 

Regulative  Activities. — In  recent  years  the  public  has 
continually  been  demanding  the  extension  of  state  enter- 
prises. Catering  to  these  demands  has  meant  increased 
costs.  The  most  noticeable  of  these  demands,  perhaps, 
has  been  for  the  various  forms  of  regulation,  and  for  the 
development  of  health  and  sanitation.  The  old  laissez- 
faire  policy  of  government  is  becoming  more  and  more 
antiquated,  while  the  public  is  placing  greater  reliance  on 
the  activities  of  the  government  to  secure  its  desires. 
This  tendency  is  clearly  shown  by  the  rapid  development 
of  functions  under  the  police  power.1  In  the  matter  of 
health  and  sanitation  governments  have  undertaken  many 
preventive  measures  in  recent  years,  while  formerly,  if 
they  were  concerned  at  all,  it  was  with  repressing  epi- 
demics which  might  arise. 

1  The  police  power  is  the  authority  of  the  American  commonwealths  to 
legislate  for  the  physical,  moral,  and  economic  welfare  of  their  citizens. 


CHARACTERISTICS  OF  PUBLIC  EXPENDITURES    39 

Extension  of  Credit. — One  other  item  which  might  be 
mentioned  as  having  influenced  the  increase  in  public 
expenditures  is  the  ease  of  public  borrowing.  Reasons  for 
this  growth  of  credit  have  already  been  noted,  and  a 
detailed  study  of  public  debts  will  be  reserved  for  a  later 
chapter.  The  ease  of  borrowing  has  given  a  supply  of 
revenue  which  could  not,  perhaps,  have  been  obtained 
had  the  other  methods  of  taxes  and  receipts  from  lands 
and  industries  alone  been  available.  So  general  has  pub- 
lic indebtedness  become  that  nearly  every  governmental 
unit  practices  the  policy  of  deficit  financiering.  Citizens 
are  willing  to  lend  to  the  government  because  its  credit  is 
good,  and  the  burden  is  not  so  apparent  as  when  revenues 
are  secured  through  taxes.  Except  where  political  units 
have  reached  the  legal  amount  of  indebtedness,  a  tendency 
toward  an  increased  use  of  this  source  of  revenue  is  easily 
recognized. 

23.  Public  Expenditures  Supply  the  Less  Material 
Wants. — Wants  of  individuals  may  be  classed  as  material 
and  immaterial.  Of  these  classes  the  individual  is  usually 
first  and  most  concerned  with  supplying  himself  with  the 
material  things.  Often  he  does  not  recognize  the  value  of 
other  than  material  goods  to  himself,  or  that  he  will  be  a 
better  member  of  society  for  having  had  them.  Then, 
too,  many  of  the  immaterial  services  are  so  remote  that 
they  would  scarcely  call  forth  individual  effort.  Many 
individuals  are  incapable  of  supplying  more  than  the 
material  needs  even  if  they  recognized  the  value  of  the 
immaterial,  while  many  cannot  even  supply  the  needed 
material  goods. 

These  services,  valuable  to  the  individual  himself  and 
to  his  usefulness  in  society,  which  he  could  not  or  would 
not  supply,  must  be  given  by  the  state  if  they  are  to  be 
had.  Ordinarily  the  state  makes  the  supplying  of  these 
immaterial  needs  a  duty  of  first  importance.  A  compari- 
son of  total  expenditures  for  each  of  the  classes  of  services 
would  show  a  much  larger  percentage  for  the  immaterial, 


40  OUTLINES  OF  PUBLIC  FINANCE 

The  supplying  of  material  goods  arises  either  when  the 
individual  cannot  supply  his  needs,  as  in  charities  and 
state  institutions,  or  when  the  recipient  pays  for  the 
utilities  in  much  the  same  way  as  he  would  if  they  were 
supplied  by  an  individual. 

The  immaterial  goods  supplied  by  the  state  might  be 
divided  into  a  number  of  classes.  One  of  the  most  impor- 
tant is  that  of  protection.  Except  in  time  of  war  the  need 
for  protection  by  the  army  and  navy  seems  so  remote  to 
the  ordinary  individual  that,  even  if  it  were  possible,  he 
would  exert  no  effort  to  secure  it.  The  Federal  govern- 
ment, therefore,  provides  it  as  a  common  service,  much 
better  and  more  effectively  than  would  individuals  if  left 
to  supply  it  for  themselves.  The  protection  to  person  and 
property  given  by  state  and  city  governments  is  also 
much  more  effective  than  if  it  were  supplied  directly  by 
individuals. 

Expenditure  for  education,  as  we  have  seen,  is  an  im- 
portant item  in  the  finances  of  each  political  unit.  This 
utility  is  considered  so  valuable  to  the  individual  and 
state  that  its  acceptance  is,  to  a  certain  degree,  compul- 
sory. The  person  with  a  public  school  education  is  so 
much  better  able  to  take  his  place  in  the  world,  and  is 
enough  more  valuable  as  a  citizen,  that  the  individual  is 
compelled  to  receive  the  education  the  public  school  can 
give.  Conservation  of  health,  sanitation,  libraries,  and 
parks  are  other  sources  of  immaterial  goods  which  the 
citizen  receives,  and  which  would  be  secured  in  a  much 
smaller  degree  if  they  were  not  supplied  by  the  state. 

24.  All  Public  Expenditures  Cannot  Be  Justified.— 
While  few  would  deny  the  value  and  necessity  of  public 
expenditure,  yet  the  desirability  of  some  uses  of  public 
funds  may  be  open  to  question.  To  lay  down  a  rule  by 
which  the  justice  of  every  expenditure  could  be  measured 
would  be  impossible,  because  of  the  immaterial  nature  of 
such  a  large  part  of  the  services  rendered.  In  general, 
however,  a  state  is  not  justified  in  making  an  expenditure 


CHARACTERISTICS  OF  PUBLIC  EXPENDITURES    41 

unless  more  utility  results  than  would  have  been  secured 
had  the  funds  been  left  in  the  hands  of  the  individuals. 
There  is  a  temptation,  where  a  public  official  is  dependent 
upon  the  constituency  of  a  particular  district,  to  spend 
public  funds  for  the  benefit  of  his  supporters.  Some  of 
our  states  recognized  this  when  the  constitutions  were 
formed,  and  attempted  constitutionally  to  prohibit  ex- 
penditures the  utility  of  which  will  be  of  less  value  than 
the  cost.  Pennsylvania  is  an  example  of  a  state  which 
early  had  a  constitutional  provision  of  this  nature.  The 
difficulty  arises,  of  course,  in  attempting  to  apply  this 
general  rule  to  particular  cases. 

It  will  be  interesting  for  the  student  to  give  examples  of 
public  expenditures  which  appear  to  him  to  be  unjusti- 
fiable. Many  will  be  of  a  local  nature,  while  others  will 
involve  state  and  Federal  governments.  The  constant 
pork-barrel  legislation  is  one  of  the  standing  criticisms 
against  Congress,  yet  every  district  is  anxious  to  get  an 
appropriation,  no  matter  how  needless.  Appropriations 
for  magnificent  post-office  buildings  in  small  towns,  and 
for  improvements  of  rivers  and  harbors,  far  in  excess  of 
any  need,  are  so  familiar  as  to  scarcely  need  mentioning. 
States  have  squandered  thousands  of  dollars  in  building 
roads  and  making  other  improvements  because  of  the 
unbusinesslike  methods  of  letting  contracts.  It  is  im- 
possible to  justify  such  expenditures  on  the  utility  basis. 

25.  Public  Expenditures  Have  Important  Economic 
Effects. — No  phase  of  Public  Finance,  perhaps,  has  re- 
ceived so  much  fallacious  reasoning  as  the  economic  effects 
of  public  expenditures.  Many  early  statesmen  and  writers 
favored  a  large  expenditure  because  it  put  money  into  cir- 
culation, increased  the  demand  for  labor,  relieved  the 
poor  by  giving  them  employment,  removed  the  objections 
to  taxes  when  the  state  returned  much  to  the  citizens,  and 
for  similar  arguments.  It  would  be  a  waste  of  time  to 
elaborate  upon  these  fallacies  for  modern  students  of  eco- 
nomics. Let  it  suffice  to  remind  them  that  lavish  and  use- 


42  OUTLINES  OF  PUBLIC  FINANCE 

less  expenditure  does  not  create  wealth.  The  more  a 
state  spends  out  of  a  given  amount,  the  less  is  left  for  in- 
dividuals to  spend.  The  demand  of  the  state  for  labor 
and  goods  is  substituted  for  that  of  the  individual.  When 
the  state  demands  materials  and  services,  therefore,  this 
demand  is  not  added  to  that  of  individuals,  as  was  for- 
merly believed,  but  exists  instead  of  the  demand  of  indi- 
viduals. The  revenue  exacted  from  industry  to  pay  an 
army  could  have  been  used  by  industry  to  pay  wages  to 
men  in  the  army  had  they  not  been  employed  by  the  state. 
The  total  demand  cannot  be  increased  by  state  expendi- 
ture— in  fact,  it  may  be  materially  decreased  becaus^  of 
expenses  in  administering  public  funds. 

Public  expenditures,  nevertheless,  do  have  important 
economic  consequences  which  should  be  kept  clearly  in 
mind.  The  answers  to  the  above  fallacies  indicate  some 
of  them.  When  the  state  enters  the  market  for  materials 
or  labor,  it  becomes  a  competitor  with  its  citizens  for  these 
same  commodities  or  services.  Under  normal  conditions, 
because  of  the  widespread  activities  of  governments,  the 
state  is  a  large  purchaser  of  goods  and  services.  In  an 
abnormal  situation,  such  as  a  war,  the  demands  of  the 
state  are  enormous.  Since  states  do  not  have  to  measure 
cost  and  value  of  the  product,  the  price  paid  for  materials 
and  services  is  not  based  upon  the  same  principle  as  in 
individual  industries.  In  cases  of  emergencies,  especially, 
as  in  the  Great  War,  the  state  is  likely  to  pay  abnormally 
high  wages  in  order  to  attract  labor,  and  abnormally  high 
prices  for  materials  in  order  to  secure  the  needed  supply. 
A  hardship  is  thus  felt  among  individuals  who  demand 
similar  services  and  materials,  but  who  cannot  pay  such 
high  prices.  The  abnormal  wages  cannot  but  have  an 
effect  on  the  worker.  With  his  increased  wages  comes  a 
higher  standard  of  living,  which  he  is  desirous  of  main- 
taining. When  the  emergency  is  past,  and  the  govern- 
ment demand  ceases,  he  must  seek  employment  where 
wages  are  determined  differently.  The  tendency  is  now 


CHARACTERISTICS  OF  PUBLIC  EXPENDITURES    43 

toward  lower  wages.  The  dissatisfaction  caused  by  such 
shifts  will  have  some  effect  in  causing  industrial  friction. 
The  artificial  demand  of  the  government  for  goods,  with  a 
subsequent  cessation,  will  have  much  the  same  effect  on 
commodity  prices  in  particular  lines. 

The  Unemployed. — The  problem  of  the  unemployed  is 
one  with  which  the  state  is  confronted.  Some  contend, 
while  recognizing  the  economic  fallacy  of  the  "make 
work"  idea,  that,  from  the  effect  on  the  individual,  it  is 
better  that  the  state  create  some  occupation  than  resort 
to  charity.  However  this  may  be,  a  more  sensible  and 
economical  scheme  would  be  for  the  state  to  utilize  labor 
for  its  needs  when  unemployment  is  greatest  hi  other 
fields.  Cities,  for  example,  could  carry  on  much  of  their 
work  as  well  at  one  time  as  another,  and  would  tend  to 
ease  the  whole  situation  by  employing  labor  when  it  is 
not  otherwise  needed,  rather  than  by  competing  for  it. 
The  same  is  true,  in  a  measure,  with  state  and  Federal 
activities. 

26.  An  Accurate  Comparative  Study  of  Expenditures  Is 
Difficult. — The  comparison  of  expenditures,  which  has 
been  made  in  this  chapter,  is  doubtless  not  entirely  ac- 
curate. A  number  of  difficulties  arise  which  make  accu- 
racy impossible.  One  of  these  difficulties  is  that  no  uni- 
form system  of  accounting  exists  for  the  various  political 
bodies  for  which  comparisons  are  to  be  made.  The  vari- 
ous items  may  not  have  the  same  meaning  in  the  different 
units.  For  example,  the  items  under  charities,  hospitals, 
and  corrections  may  not  include  comparative  sums  for 
the  different  states  or  cities.  Again,  in  our  judicial  sys- 
tem, where  fees  play  such  a  large  part,  and  are  used  in 
such  a  variety  of  ways,  an  accurate  comparison  of  costs 
would  be  out  of  the  question.  In  some  cases  the  fee  repre- 
sents the  entire  cost  of  the  service;  hi  others  it  may  be 
only  a  part  of  the  cost,  or  no  account  may  be  taken  of  it 
by  the  treasury.  Similar  difficulties  are  found  in  attempts 
to  compare  practically  every  item  of  expenditure. 


44  OUTLINES  OF  PUBLIC  FINANCE 

The  obstacles  in  the  way  of  preparing  a  comparison  of 
expenditures  for  different  countries  are  still  more  formi- 
dable. The  systems  of  government  are  different,  and  just 
as  different  are  the  methods  for  attacking  the  fiscal  prob- 
lems. In  some  countries,  as  in  the  United  States,  a  large 
percentage  of  expenditure  is  given  over  to  the  local  gov- 
ernmental units,  while  in  other  countries,  as  in  France,  a 
larger  part  is  undertaken  by  the  central  government.  In 
some  countries  separate  accounts  are  not  maintained  by 
the  local  and  central  governments,  and  the  local  units  are 
simply  agents  for  the  expenditures  of  the  larger  bodies. 
Instead  of  pensions  for  worthy  citizens,  many  states  use 
public  employment  as  a  means  to  accomplish  the  same 
end.  Obviously,  then,  a  comparison  of  gratuities  for 
different  countries  would  be  misleading.  These  sugges- 
tions as  to  the  difficulties  will  indicate  the  disappointing 
results  that  must  come  from  an  attempt  at  accurate  com- 
parison of  public  expenditures. 

27.  Attempts  to  Find  a  Proper  Proportion  of  Expendi- 
ture to  National  Income  Have  Failed. — Many  writers 
have  attempted  to  ascertain  what  proportion  of  the 
national  income  should  be  spent  by  the  state.  Some  have 
attempted  a  percentage  relationship,  and  suggestions  have 
ranged  from  5  to  25  per  cent.  Others  have  suggested  a 
per  capita  basis,  and  still  others  claim  that  expenditure 
should  be  gauged  by  area.  The  nature  of  the  factors, 
however,  which  should  control  the  amount  of  expenditures, 
largely  vitiates  any  relations  such  as  these. 

The  nature  of  the  expenditure  will  have  much  force  in 
the  determination  of  the  proper  percentage  of  total  in- 
come to  be  spent  by  the  state.  If  a  state  be  engaged  in  a 
defensive  war,  for  example,  it  would  be  proper  to  go  to 
any  length  in  its  expenditures.  A  larger  percentage  would 
be  justified  on  some  commercial  enterprise  which  would 
bring  a  future  return  than  on  one  which  would  not.  The 
size  of  the  income  is  itself  an  item  of  importance.  A  15 
per  cent  expenditure  for  a  country  with  a  large  income 


CHARACTERISTICS  OF  PUBLIC  EXPENDITURES    45 

might  be  much  less  burdensome  than  a  10  per  cent 
expenditure  for  a  country  with  a  small  income.  Per 
capita  and  area  bases  are  still  more  unsatisfactory.  A 
per  capita  comparison  of  income  and  expenditure  of  the 
state  of  Illinois  and  some  of  the  provinces  of  China  would 
show  the  uselessness  of  such  a  basis.  Area  fails  in  much 
the  same  way,  as  it  shows  neither  amount  of  income  nor 
the  need  for  state  activity.  Any  attempt  to  measure  what 
the  state  should  spend  must  consider  not  only  the  amount 
of  income,  but  also  the  nature  of  the  need  for  the  expend- 
iture and  the  hardship  it  will  entail. 

ADDITIONAL  READING 

Census  reports: 

Financial  Statistics  of  Cities. 

Financial  Statistics  of  States. 

Wealth,  Debt,  and  Taxation. 
Statistical  Abstract  of  the  United  States. 


CHAPTER  III 

CLASSIFICATION   OF  PUBLIC   EXPENDITURES 

28.  Many  Bases  Have  Been  Used  in  Attempting  to 
Classify  Expenditures. — The  early  classifications  of  ex- 
penditures in  Italy  and  France  have  been  noted.  These 
were  based  upon  the  objects  for  which  the  money  was 
used,  such  as  government  and  protection.  Many  other 
bases  have  been  attempted  with  a  varying  degree  of  satis- 
faction as  to  results.  Some  have  sought  to  divide  ex- 
penditures into  ordinary  and  extraordinary,  while  others 
have  attempted  to  separate  the  necessary  from  the  un- 
necessary or  to  make  the  classes  the  necessary,  the  desir- 
able, and  the  superfluous.  Some  have  tried  to  distin- 
guish between  money  spent  productively  and  that  spent 
unproductively,  while  a  merely  historical  evolution  has 
sometimes  been  used.  The  United  States  Census  Bureau 
has  worked  out  a  statistical  and  accounting  classification 
based  largely  on  functional  activities.  A  classification, 
aside  from  a  mechanical  one,  which  is  perhaps  the  most 
interesting,  is  based  on  the  method  of  conferring  benefits. 
It  will  be  interesting  to  note  some  of  the  purposes  and 
difficulties  of  these  classifications. 

29.  Some  Attempts  at  Classification  Have  Been  Un- 
satisfactory.— At  any  particular  time,  especially  if  the 
budget  system  be  in  use,  ordinary  and  extraordinary  ex- 
penditures can  be  rather  closely  distinguished.  The 
names,  in  reality,  explain  themselves.  Ordinary  expendi- 
ture is  that  which  is  expected,  while  the  extraordinary  is 
for  the  unanticipated  demands  Expenditure  for  war 
would  be  extraordinary,  while  that  for  the  maintenance  of 


CLASSIFICATION  OF  PUBLIC  EXPENDITURES     47 

a  standing  army  or  navy  would  be  ordinary.  While  such 
a  classification  can  be  made  at  a  particular  time,  it  will 
not  hold  over  a  long  period  of  time,  nor  often  for  even  a 
period  of  short  duration.  Government  activities  have 
been  increasing  at  such  a  pace  that  an  extraordinary  use 
of  funds  five  years  ago  may  now  be  considered  perfectly 
regular.  Even  an  extraordinary  expenditure  for  war  in  a 
particular  year  may  be  considered  as  a  normal  expenditure 
the  following  year.  It  is  seen,  then,  that  the  classification 
has  no  permanency,  and  a  particular  item  of  state  activity 
cannot  be  referred  to  as  " ordinary"  with  no  reference  to 
the  time  element. 

Much  the  same  objection  can  be  raised  against  the 
" necessary,  desirable,  and  superfluous"  classification.  A 
superfluous  undertaking  at  one  time  may  become  desir- 
able at  another  and  necessary  at  still  another.  Besides 
the  time  element,  the  element  of  personal  judgment  plays 
an  important  part  in  this  classification.  The  terms  are 
at  best  relative,  and  what  might  be  considered  necessary 
at  a  particular  time  by  one  official  or  voter  might  be 
branded  by  others  as  superfluous  and  extravagant.  The 
difficulty  of  getting  any  standard  of  measurement  is  in- 
surmountable. Although  the  distinction  of  productive 
and  unproductive  expenditure  held  an  important  place 
for  early  students,  it  has  little  significance  at  present. 
The  idea  of  production  has  changed  from  Adam  Smith's 
notion  of  making  a  " material  and  vendable  commodity" 
to  that  of  a  creation  of  utilities.  The  vast  majority,  if  not 
all,  of  public  funds  are  thus  spent  productively,  although 
it  might  be  impossible  to  justify  them  from  the  ethical 
standpoint.  A  historical  classification  is  interesting,  pri- 
marily, in  showing  the  evolution  of  state  activities. 

30.  The  United  States  Census  Bureau  Classifies  Ex- 
penditures.— While  the  census  classification  is  largely  for 
mechanical  purposes,  American  students  should  be  in- 
terested in  the  method  of  listing  and  handling  the  funds. 
There  are  two  primary  classifications,  those  known  as 


48  OUTLINES  OF  PUBLIC  FINANCE 

governmental  cost  payments,  and  the  nongovernmental 
cost  payments.  The  former  includes  all  the  costs  of  any 
political  unit,  accrued,  paid,  or  payable,  for  services,  for 
property,  whether  bought,  rented,  or  constructed,  and 
all  expenditures  for  public  improvements.  It  also  in- 
cludes all  costs  of  materials  used  for  whatever  purposes, 
interest  on  funds  borrowed  for  running  the  government, 
and  the  costs  of  the  different  kinds  of  protection.  All 
expenditures  for  social  activities  are  included,  as  well 
as  the  costs  of  caring  for  delinquent,  defective,  and 
dependent  classes.  The  costs  of  other  services  per- 
formed by  governments  which  cannot  be  easily  classi- 
fied are  also  put  under  this  head.  As  a  matter  of  con- 
venience governmental  costs  are  divided  into  expenses, 
interest,  and  outlays. 

Expenses  include  all  payments  other  than  interest  from 
which  no  permanent  or  subsequently  realizable  value  is 
received.  Such  are  salaries,  rents,  costs  of  materials  used 
in  government  activities,  and  the  management  of  funds. 
It  would  also  include  losses  from  fraud,  failures,  or  similar 
circumstances.  Expenses  are  divided  into  two  large 
classes — those  for  the  general  departments,  and  those  for 
public  service  enterprises.  The  former  are  subclassified 
into  the  costs  of  the  principal  divisions  under  which  the 
work  of  the  general  departments  is  carried  on. 

Interest,  of  course,  is  the  amount  paid  for  borrowed 
funds.  Outlays  designate  the  payments  for  land,  build- 
ings, public  improvements,  and  other  similar  payments, 
and  are  used  in  carrying  on  some  government  function  or 
business  which  possesses  some  degree  of  permanency. 
Any  revenue  which  may  be  secured  from  these  enterprises 
is  deducted  from  the  outlay  expenditure. 

Nongovernmental  cost  payments  are  all  the  expendi- 
tures not  included  in  the  above  classification.  They  are 
items  usually  of  minor  importance  as  compared  to  the 
above,  which  do  not  enter  into  the  general  activities. 
Examples  are  cost  of  goods  to  be  resold,  paying  of  debts, 


CLASSIFICATION  OF  PUBLIC  EXPENDITURES     49 

and  the  balancing  of  accounts  between  different  depart- 
ments. While  this  classification  is  more  or  less  obscure 
as  to  the  exact  nature  of  the  expenditures,  yet,  should  all 
our  political  units  adopt  it,  comparative  figures  of  ex- 
penditure would  be  more  easily  available. 

31.  Expenditures  May  Be  Divided  into  Four  Classes, 
According  to  Benefit  Conferred. — None  of  the  classifica- 
tions which  have  just  been  noted  indicate  to  any  degree 
the  underlying  motive  in  making  expenditures.  There  has 
been  nothing  to  indicate  whether  many  or  a  few  citizens 
have  been  the  recipient  of  the  funds  spent,  or  whether 
individuals  benefited  have  helped  to  bear  the  expense  of 
the  service.  Obviously  such  a  classification,  while  it  could 
not  be  exact,  would  be  of  interest  to  students  of  fiscal 
problems.  Professor  Cohn  has  proposed  a  division  of 
state  activities  which  readily  lends  itself  into  a  classifica- 
tion of  expenditures  on  the  basis  of  benefits  conferred.1 

Four  groups  of  expenditure  may  be  distinguished  ac- 
cording to  the  degree  in  which  individual  benefit  is  the 
motive.  By  far  the  larger  part  of  the  state's  expenditure, 
however,  is  not  concerned  primarily  with  individuals,  but 
with  the  population  in  general.  Hence  the  most  important 
class  of  expenditures  would  be  for  the  common  benefit. 
The  state  also  undertakes  activities  which  directly  aid 
particular  classes,  yet  makes  payment  entirely  from  the 
common  fund.  This  class  might  be  termed  expenditure 
for  particular  individuals,  yet  treated  as  a  common  benefit. 
Many  state  functions,  moreover,  are  undertaken  primarily 
for  the  common  good,  yet  they  also  confer  individual 
benefits  for  which  the  recipient  is  required  to  make  pay- 
ment. This  might  be  termed  the  rendering  of  a  common 
benefit,  but  at  the  same  time  a  special  benefit.  It  is  con- 
ceivable, too,  that  the  state  might  undertake  activities 
which  confer  only  special  benefits,  and  this  would  make 
a  fourth  class  of  expenditure  on  the  basis  of  benefits  con- 
ferred. 

1  Finanzwissenschaft,  p.  117. 


50  OUTLINES  OF  PUBLIC  FINANCE 

32.  Important  State  Services  Are  Found  in  Each  Class 
of  Expenditure. — It  will  be  interesting  to  note  some  ac- 
tivities which  fall  under  each  of  the  above  classes,  and 
then  consider  the  more  important  ones  somewhat  in  de- 
tail.   A  large  number  fall  under  expenditure  for  the  com- 
mon benefit.    Among  those  that  at  once  present  them- 
selves to  the  mind  of  the  reader  are  the  use  of  funds  for 
protection,  for  the  general  government,  for  education,  for 
highways,  for  maintenance  of  standards  of  coinage,  for 
weights  and  measures,  for  diplomatic  and  consular  serv- 
ice, for  maintenance  of  public  buildings,   and  for  the 
numerous   aids  to  developing   commerce  and  industry. 
The  most   important   of  expenditures   for    individuals, 
yet  treated  as  common,   are  those  for  defectives  and 
dependents.    Bounties  and  pensions  could  also  be  placed 
in  this  class. 

Most  of  the  numerous  services  for  which  fees  are  charged 
fall  under  the  group  of  expenditures  which  confer  some 
special  benefit  along  with  the  common  benefit.  The  ad- 
ministration of  the  courts,  maintaining  patent  and  copy- 
right systems,  and  chartering  corporations  are  examples. 
Paving  streets,  laying  sidewalks,  and  building  sewers  are 
usually  treated  in  a  similar  manner.  The  class  of  expend- 
itures for  individual  benefits  is  composed  of  the  industries 
carried  on  by  the  state  on  a  commercial  basis,  and  of  the 
monopolies  maintained  primarily  for  fiscal  purposes.  The 
importance  of  these  items  varies  in  different  countries, 
and  from  time  to  time  in  the  same  country. 

33.  Reference  to  Statistics  Shows  Relative  Importance 
of  Principal  Expenditures. — There  is  no  better  way  to 
gain  at  a  glance  an  idea  of  the  importance  of  the  various 
classes  of  expenditures  than  to  refer  to  statistical  tabula- 
tions such  as  those  found  in  Chapter  II.1     These  tables 
will  show  this  relation,  as  well  as  the  general  increase  in 
expenditures.    The  following  table  will  show  the  relative 
importance  of  the  various  items  in  the  states,  counties, 

1  See  pp.  31-34. 


CLASSIFICATION  OF  PUBLIC  EXPENDITURES     51 

and  incorporated  places  1  for  1913,  the  latest  figures  avail- 
able for  all  the  units:2 


GOVERNMENTAL  COST  PAYMENTS,  1913 

General  Government: 

States $  40,496,000    Per  capita $0.42 


Counties 102,335,000 

Incorporated  places 68,941,000 

Protection  to  Person  and  Property: 

States $  25,066,000 

Counties 15,213,000 

Incorporated  places 140,697,000 

Conservation  of  Health  and  Sanitation: 

States $    6,388,000 

Counties 2,815,000 

Incorporated  places 60,434,000 

Highways : 

States $  16,884,000 

Counties 55,515,000 

Incorporated  places 87,170,000 

Charities,  Hospitals,  and  Corrections: 

States $  87,586,000 

Counties 37,816,000 

Incorporated  places 32,896,000 

Schools: 

States $132,575,000 

Counties 57,682,000 

Incorporated  places 223,896,000 

Recreation: 

States $     1,983,000 

Counties 420,000 

Incorporated  places 21,438,000 

Public  Service  Enterprises: 

States $    3,461,000 

Counties 189,000 

Incorporated  places 64,194,000 


1.19 
1.50 


Per  capita $0.26 

"     0.18 

"       "     3.08 

Per  capita $0.07 

"        "     0.03 

"     1.32 

Per  capita $0.17 

"        "     0.65 

"        "     1.91 

Per  capita $0 . 90 

"        "     0.44 

"        "  0.72 


Per  capita . 


$1.37 
0.67 
4.90 


Per  capita $0 . 02 

"     0.005 

"       «      0.47 

Per  capita $0.04 

"        "     0.005 

"        "  1.41 


Expenditures  of  States. — The  following  figures  for  the 
expenditures  of  states  are  more  detailed  than  in  the  previ- 
ous table  or  the  comparative  one  in. the  previous  chapter. 
The  figures  are  for  1918: 

1  Incorporated  places  include  all  those  with  a  population  of  about  2,500, 
and  above. 

2  The  statistical  compilations  in  this  chapter  have  been  made  from  re- 
ports by  the  Bureau  of  Census.     Sec  note,  p.  31. 


52  OUTLINES  OF  PUBLIC  FINANCE 

EXPENDITURES  OF  STATES,  1918  l 

Total  expenditure  of  all  states,  $473,962,000. 
I.  General  Government: 

(a)  Total $  51,395,000 

(b)  Legislative 8,182,000 

(c)  Judicial 19,224,000 

(d)  Executive 19,589,000 

(e)  Elections 701,000 

(f)  Government  buildings 3,610,000 

II.  Protection  to  Person  and  Property: 

(a)  Total $  33,290,000 

(b)  Police 1,719,000 

(c)  Fire 586,000 

(d)  Regulating  financial  institutions 2,107,000 

(e)  Regulating  public  utilities 3,896,000 

III.  Charities,  Hospitals,  and  Corrections: 

(a)  Total $118,084,000 

(b)  Poor  in  institutions 333,000 

(c)  Care  of  children 3,330,000 

(d)  Blind,  deaf,  mute 6,172,000 

(e)  Other  charities 9,474,000 

(f)  General  hospitals 5,762,000 

(g)  Hospitals  for  insane 49,950,000 

(h)  Adult  Correction 33,000,000 

(i)  Minor  Correction 8,471,000 

IV.  Education: 

(a)  Total $164,452,000 

(b)  Supervision 4,070,000 

(c)  State  Institution 52,581,000 

(d)  Apportionments 104,841,000 

(e)  Libraries 1,268,000 

V.  Development  and  Conservation  of  Natural  Resources: 

(a)  Total $  21,634,000 

(b)  Agriculture 17,061,000 

VI.  Health  and  Sanitation: 

(a)  Total $  12,249,000 

(b)  Tuberculosis 5,748,000 

VII.  Highways: 

(a)  Total $  38,829,000 

34.  Expenditure  for  Protection  Is  an  Important  Item.— 
A  glance  at  the  statistics  just  given  and  at  those  in  the 

1  It  will  be  an  interesting  gxercise  for  the  reader  to  secure  a  copy  of 
Financial  Statistics  of  States  for  the  current  year,  and  compare  the  various 
expenditures  of  his  state  with  the  average,  and  with  the  expenditures  of 
other  states. 


CLASSIFICATION  OF  PUBLIC  EXPENDITURES     53 

preceding  chapter  will  show  that  the  expenses  incurred 
for  protection  to  person  and  property  are  large.  In  the 
Federal  government  a  large  part  of  such  expense  is  for 
the  army  and  navy.  The  maintenance  of  these  modern 
instruments  of  war  in  time  of  peace  is  costly,  while  in 
time  of  actual  warfare  their  cost  is  enormous.  This  is 
not  only  true  of  the  United  States,  but  of  every  important 
country.  In  fact,  the  expenditure  has  been  much  greater 
in  European  states  than  in  the  United  States.  This  has 
been  due  largely  to  the  proximity  of  the  European  states 
and  the  existing  enmity  caused  by  past  wars.  Even  be- 
fore the  Great  War  attempts  were  being  made  to  find 
some  other  means  of  settling  international  differences,  and 
for  upholding  national  honor,  than  by  the  commonly  ac- 
cepted one — war.  It  was  generally  conceded  that  the 
Hague  conferences  had  proceeded  far  in  this  direction. 
The  Great  War,  of  course,  disillusioned  the  minds  of  those 
who  thought  wars  a  thing  of  the  past.  It  remains  to  be 
seen  what  effect  the  League  of  Nations  will  have  on  ex- 
penditures for  armies  and  navies. 

Cost  of  Maintaining  Armies. — An  attempt  to  get  satis- 
factory comparative  costs  for  maintaining  the  military 
machine  in  different  countries  would  meet  with  unsatis- 
factory results.  One  important  reason  for  this  is  the  dif- 
ferent systems  used  in  maintaining  armies.  The  system 
which  has  been  used  in  Germany,  compared  with  England 
or  the  United  States,  for  example,  will  indicate  the  futility 
of  any  close  comparison  of  costs.  Germany  has  followed 
the  plan  of  compulsory  military  training  for  all  male  citi- 
zens. The  standing  army,  then,  is  made  up  of  this  citizen- 
ship which  is  serving  without  remuneration  from  the 
state. 

In  England  and  the  United  States,  on  the  other  hand, 
the  army  is  maintained  on  the  basis  of  paid  enlistment. 
A  part  of  the  citizenship  makes  the  army  their  vocation, 
for  which  they  receive  pay  from  the  state.  From  the 
standpoint  of  direct  cost  the  plan  pursued  in  England 


54  OUTLINES  OF  PUBLIC  FINANCE 

and  in  the  United  States  would  appear  to  be  the  more 
expensive  per  man.  Before  total  costs  could  be  reckoned, 
however,  a  number  of  other  factors  would  have  to  be 
considered.  Such  would  be  the  expense  of  training  under 
the  two  systems,  the  effect  of  general  training  upon  the 
individual  citizens,  and  the  effect  upon  industrial  and 
commercial  development.  A  real  comparison  of  the  first 
item  would  be  difficult  because  of  different  wage  and  liv- 
ing standards  in  various  countries.  An  enlisted  army  is 
paid  entirely  from  taxes,  while  in  the  other  system  services 
are  substituted  for  taxes.  Rather  than  give  the  service, 
large  sums  might  be  willingly  given  in  taxes.  Of  course 
there  is  no  way  of  measuring  this  feeling  of  sacrifice. 

Training,  moreover,  cannot  but  affect  the  individual. 
Unless  conducted  in  connection  with  an  educational  in- 
stitution it  means  a  postponement  of  preparation  for 
industrial  and  social  activities.  Where  general  services 
are  demanded,  it  is  evidently  impossible  to  conduct  a 
very  large  proportion  of  it  in  connection  with  other  forms 
of  education.  As  a  whole,  it  means  the  postponement  of 
a  settled  life  until  the  period  of  military  service  is  com- 
pleted. Such  a  situation  cannot  but  have  a  deleterious 
effect  on  industry.  Aside  from  the  fact  that  men  do  not 
get  settled  into  their  life  tasks  until  comparatively  late, 
it  must  be  remembered  that  industry  is  deprived  of  the 
services  of  its  entire  citizenship  during  the  period  of 
training.  If  all  these  factors  could  be  measured  on  a 
money  basis  the  cost  of  the  universal  service  plan  would 
no  doubt  prove  to  be  much  greater  than  is  sometimes 
thought. 

Costs  of  War. — The  expenses  of  actual  wars  are  not  a 
part  of  the  costs  of  a  standing  army,  but  must  be  treated 
as  extraordinary.  That  they  mount  to  almost  unbeliev- 
able figures  is  the  common  knowledge  of  everyone  who 
has  observed  expenditures  due  to  the  Great  War.  Legis- 
lative bodies  made  appropriations  day  after  day  which,  a 
few  years  before,  would  have  been  greeted  with  horror, 


CLASSIFICATION  OF  PUBLIC  EXPENDITURES      55 

A  few  comparative  figures  of  the  Great  War  will  recall 
the  enormity  of  the  cost.  The  direct  cost  of  the  war  to 
the  United  States  from  July  1  to  December  31,  1917, 
was  about  $5,992,000,000.  If  loans  to  the  Allies  were 
added  to  this  it  would  raise  the  figure  to  well  over  $9,- 
000,000,000.  Had  the  war  continued  through  the  fiscal 
year  in  which  the  armistice  was  signed  it  is  estimated  that 
about  $25,000,000,000  would  have  been  used. 

From  April  1,  1916,  to  March  31,  1917,  England  spent 
for  the  war  almost  $11,000,000,000,  a  daily  expenditure 
of  over  $30,000,000.  From  January  1  to  December  31, 
1917,  the  cost  of  the  war  to  France  was  about  $5,820,- 
000,000.  The  figures  for  the  other  belligerent  coun- 
tries are  similar,  and  the  total  reaches  an  amount  so  large 
as  to  have  no  real  meaning.  Modern  war  places  such  a 
burden  on  a  country  that  the  efforts  of  a  number  of  future 
generations  will  be  required  to  remove  it.1 

Functions  of  Army  and  Navy. — It  would  be  impossible 
to  place  the  maintenance  of  the  army  and  navy  on  a  cost 
and  value  of  service  basis.  If  they  were  useless  except  in 
time  of  war,  it  would  seem  that  a  large  amount  is  being 
expended  with  little  return.  This  would  be  true  if  only 
the  returns  from  war  be  considered.  Other  services,  how- 
ever, are  rendered.  The  navy  gives  protection  to  ship- 
ping, and  thus  aids  the  development  of  commerce  and 
industry.  The  existence  of  an  army  gives  a  sense  of 
security,  and  no  doubt  does  much  to  keep  down  both 
internal  and  external  disturbances  which  might  other- 
wise arise.  The  services  supplied  by  the  expenditures 
of  the  Federal  government  for  army  and  navy,  then, 
are  largely  of  a  nature  the  value  of  which  cannot  be 
measured. 

35.  States  and  Cities  Make  Expenditures  for  Protec- 
tion.— The  giving  of  internal  protection  is  largely  taken 
care  of  by  the  individual  states,  cities,  or  other  political 

1 A  more  detailed  discussion  of  the  cost  of  war  will  be  found  in  Chapter 
XX. 


66  OUTLINES  OF  PUBLIC  FINANCE 

units.  The  Federal  government,  at  times,  is  called  upon 
to  give  assistance  in  supplying  this  class  of  protection. 
Reference  to  the  table  on  page  51  will  show  the  relative 
importance  of  protective  expenditure  by  states,  counties, 
and  incorporated  places.  The  tables  in  Chapter  II,  pages 
31  and  32,  will  show  the  relative  importance  of  this  class 
of  expenditure  to  other  expenditures  of  the  different  po- 
litical units.  The  cost  of  protection  in  cities  and  incor- 
porated places  is  much  greater,  both  in  Mo  and  per  capita, 
than  in  the  states  or  counties.  This  is  due  to  the  main- 
tenance of  police  and  fire  protection.  This  expenditure  is 
also  greater  as  a  state  item  than  for  the  counties.  As  an 
item  of  state  expenditure  it  ranks  comparatively  low, 
coming  about  fourth  in  importance.  In  cities  it  is  rela- 
tively high,  coming  about  second.  As  cities  increase  in 
size  the  cost  of  protection  increases  more  rapidly  than  the 
population.  Reference  to  the  table  on  page  34  shows  the 
per  capita  expenditure  of  the  smaller  cities  for  protection 
to  be  considerably  less  than  that  of  the  larger  ones.  As 
in  the  case  of  the  Federal  government,  this  protection 
cannot  be  put  on  a  cost  and  value  of  service  basis.  There 
is  no  way  of  knowing  what  the  citizenship  would  be  willing 
to  give  up  rather  than  to  do  without  the  protective 
services.  The  direct  economic  returns  may  appear  small, 
yet  the  immaterial  returns  are  immeasurable. 

36.  Expenditures  for  the  General  Government  Are  for 
the  Common  Benefit. — While  expenditure  for  the  general 
government  is,  as  a  whole,  not  one  of  the  largest,  it  is, 
nevertheless,  important.  It  occurs  in  all  political  divisions 
and  occupies  a  position  of  about  the  same  relative  im- 
portance. Reference  to  the  preceding  tables  will  show 
that  in  the  Federal  government  this  item  stands  about 
third  or  fourth  in  comparison  to  other  expenditures;  in  the 
states  and  in  the  cities  it  is  the  item  third  in  importance. 
The  chief  items  included  under  general  government  ex- 
penses are  for  the  executive  and  legislative  functions,  some 
judicial  costs,  and  costs  of  public  buildings.  Perhaps  the 


CLASSIFICATION  OF  PUBLIC  EXPENDITURES     57 

expenses  incident  to  securing  revenues  should  also  be 
included  here. 

Administrative  Expenditures. — The  largest  executive 
expenditures  come  in  the  administration  of  laws.  The 
officers  concerned  with  executing  law  are  not  the  same  in 
different  countries,  but  vary  with  the  form  of  government. 
In  monarchical  countries  there  is  usually  a  considerable 
expenditure  for  the  maintenance  of  the  chief  ruler  and  his 
court.  No  corresponding  expenditure  is  found  in  demo- 
cratic countries.  The  salaries  and  positions  of  chief  ex- 
ecutives in  the  latter  correspond  somewhat  to  the  various 
ministerial  officers  in  the  former.  The  heads  of  monar- 
chical states  formerly  had  a  private  income  from  lands 
which  subsequently  became  a  part  of  the  public  domain. 
At  present,  then,  the  expense  must  be  met  from  the  com- 
mon treasury.  It  is  usually  much  greater  than  the  cost 
of  the  chief  ruler  of  democratic  states.  The  royal  family 
of  England,  for  example,  is  an  annual  expense  of  about 
$2,500,000  as  compared  with  the  $100,000  given  to  the 
President  of  the  United  States. 

The  chief  ruler  in  constitutional  monarchies,  such  as 
England,  has  very  little  part  in  the  actual  affairs  of  gov- 
ernment. The  functions  of  his  position  are  largely  social 
and  involve  expenses  for  maintenance  and  entertainment. 
On  economic  grounds  such  expenditure  cannot  be  justified 
beyond  the  point  of  acquiring  greater  efficiency.  It  may, 
however,  increase  the  pride  of  the  citizenship  in  the  state, 
or  increase  their  reverence  through  a  feeling  of  awe  at 
the  splendor  of  the  government.  It  is  a  question,  however, 
if  more  respect  would  not  be  secured  if  the  expenditure 
were  made  in  such  a  way  as  to  be  felt  by  the  citizenship 
in  a  more  tangible  and  material  form. 

Democracies,  moreover,  are  not  entirely  free  from  this 
class  of  expenditure.  Public  buildings  are  often  con- 
structed of  expensive  design  and  materials  far  beyond  the 
call  of  pure  economic  need  and  efficiency.  A  number  of 
county  court  houses,  city  halls,  and  state  capitols  testify 


58  OUTLINES  OF  PUBLIC  FINANCE 

to  this.  While  there  is  no  direct  economic  justification  for 
such  expenditure,  hi  most  cases  the  majority  of  the  citi- 
zenship agree  as  to  its  wisdom.  The  psychic  value  in 
appeal  to  civic  pride  and  cultural  development  frequently 
offsets  any  deficit  on  the  economic  side. 

Executive  officials  are,  of  course,  found  in  the  minor 
political  divisions.  Frequently  the  cost  for  these  is  greater 
in  democracies  than  in  other  forms  of  government.  In 
England  and  other  constitutional  monarchies  such  posi- 
tions are  made  of  long  tenure  and  are  clothed  with  con- 
siderable honor.  Because  of  this  honor,  people  of  means 
can  be  found  to  fill  the  position  for  little  or  no  remunera- 
tion. This  situation  is  seldom,  if  ever,  found  in  the 
United  States.  In  estimating  whether  it  is  in  reality  a 
saving,  the  efficiency  of  the  service  must  be  considered  in 
each  case.  The  objections  to  gratuitous  services,  which 
are  discussed  on  page  75,  are  of  course  applicable  here. 
It  would  be  impossible  to  get  the  exact  executive  costs  of 
the  minor  civil  divisions  of  the  United  States,  because  the 
officials  must  often  handle  other  duties  than  those  of  an 
executive  nature. 

Federal  Legislative  Expenditures. — The  expenditures  con- 
nected directly  or  indirectly  with  making  laws  form  an 
important  place  in  the  costs  of  the  general  government. 
In  some  cases  many  items  go  to  make  up  the  total  expend- 
iture, while  in  others  the  items  are  few  and  little  is  ex- 
pended. Much  depends  upon  the  law  and  custom  of  the 
various  states.  In  England  the  expenses  of  Parliament 
are  comparatively  low.  Few  salaries  are  paid  to  members, 
while  public  documents  are  not  printed  for  free  distribu- 
tion. The  cost  seems  smaller  than  it  really  is,  since  some 
of  the  administrative  officers  exercise  legislative  functions 
and  a  part  of  their  expense  should  be  considered  as 
legislative. 

In  the  United  States  many  more  items  enter  into  the 
costs  of  Congress.  While  each  member  receives  an  annual 
salary  of  $7,500,  this  by  no  means  forms  the  entire  cost. 


CLASSIFICATION  OF  PUBLIC  EXPENDITURES    59 

Those  who  have  been  present  at  sessions  of  Congress  have 
been  impressed  with  the  number  of  pages  in  constant 
attendance.  These,  together  with  the  provision  for  nu- 
merous clerks,  traveling  expenses,  and  stationery,  help  to 
swell  costs.  The  expense  of  getting  information  through 
investigations  and  public  hearings  is  large.  One  of  the 
largest  single  items  is  the  expense  of  printing.  Reports 
and  speeches  of  all  kinds  are  printed  at  public  expense, 
and  in  such  quantities  that  they  can  have  a  wide  distribu- 
tion. The  franking  privilege,  which  has  been  granted  to 
our  Congressmen,  no  doubt  has  an  influence  on  our  print- 
ing cost,  since  thousands  of  speeches  are  printed  and  sent 
to  constituents  which  would  remain  unsent  if  postage  had 
to  be  paid.  An  easy  and  wide  dissemination  of  knowledge 
is  desirable,  but  it  would  be  difficult  to  justify  the  print- 
ing and  distributing,  at  public  expense,  of  much  of  the 
partisan  and  campaign  literature  for  which  the  postal 
system  is  gratuitously  used. 

Other  Legislative  Expenditures. — Legislative  costs  are 
also  found  in  the  various  minor  civil  divisions — states, 
counties,  cities,  and  villages.  Counties  perform  very  few 
legislative  functions,  while  municipal  councils  are  seldom 
purely  of  this  type,  hence  such  costs  for  these  bodies 
cannot  be  accurately  determined.  The  lawmaking  bodies 
of  the  states,  however,  are  purely  legislative.  The  costs 
are  salaries,  clerk  hire,  and  similar  items.  Usually  the 
members  of  the  legislature  are  paid  by  the  day,  plus' 
mileage,  with  permission  to  appropriate  funds  for  inciden- 
tal expenses,  such  as  lodging,  stationery,  and  stenographic 
work.  Such  abuse  has  been  made  of  this  privilege,  and 
funds  have  been  squandered  to  such  an  extent,  that  some 
states  have  put  limitations  upon  the  length  of  legislative 
sessions  and  upon  the  amount  of  appropriations  that  may 
be  made  for  the  personal  use  of  the  legislators.  Some 
judicial  costs,  such  as  those  of  the  Supreme  Court,  are 
largely  met  from  the  common  treasury.  Such  a  large 
part  of  the  judicial  system  is  now  on  the  basis  of  part 


60  OUTLINES  OF  PUBLIC  FINANCE 

payment  by  the  recipient  of  the  service,  however,  that  a 
discussion  of  this  service  more  properly  belongs  with  that 
class  of  expenditure. 

Public  Buildings. — Public  buildings  are  a  necessary  part 
of  the  machinery  for  carrying  on  the  functions  of  the  gen- 
eral government.  Aside  from  the  continual  cost  of  care 
and  upkeep,  they  represent  an  investment  of  the  taxpayers 
which,  had  it  been  left  with  them,  would  be  a  source  of 
income.  In  the  construction  and  maintenance  of  public 
buildings  this  fact  should  be  kept  in  mind,  so  that  no 
more  will  be  spent  than  is  necessary  to  accomplish  the 
economic,  political,  and  cultural  ends  in  view. 

Collection  of  Revenue. — The  machinery  for  collecting  and 
handling  revenues  in  the  various  political  divisions  is 
maintained  as  a  part  of  the  general  government.  Com- 
parisons as  to  the  percentage  of  cost  for  collecting  the 
total  revenues  for  different  countries,  or  divisions  of  the 
same  country,  are  valueless.  This  is  because  of  the  variety 
of  sources  of  revenue.  Some  countries  or  divisions  may 
own  and  operate  one  or  more  public  enterprises  at  little, 
if  at  all,  above  cost.  In  such  cases  the  cost  of  collection 
would  be  near  100  per  cent.  If  the  United  States  were  to 
consider  the  postal  returns  as  a  part  of  its  revenue,  the 
cost  of  collecting  this  part  would  be  more  than  100  per 
cent  for  more  years  than  it  would  be  less  than  this,  because 
a  deficit  has  so  often  appeared.  When  total  revenues  and 
expenses  of  collection  are  considered,  those  divisions 
operating  a  number  of  public  enterprises  will  show  a  rela- 
tively high  cost  of  collection.  The  only  satisfactory  com- 
parison would  be  for  particular  classes  of  revenue,  such  as 
the  cost  of  collecting  the  customs  duties,  income  tax,  or 
internal  revenues. 

37.  Consular  and  Diplomatic  Services  Have  Been  Ex- 
pensive.— The  services  given  by  consuls  and  diplomats 
represent  a  governmental  activity  which  has  been  more 
expensive  in  many  countries  than  the  economic  returns 
will  warrant.  Countries  which  maintain  lavish  courts  at 


CLASSIFICATION  OF  PUBLIC  EXPENDITURES     61 

home  have  the  notion  that  their  prestige  can  be  estab- 
lished abroad  by  maintaining  similar  establishments  in 
foreign  countries.  The  real  service  which  these  represent- 
atives might  give  is  often  overshadowed  by  the  ostenta- 
tious display  of  the  establishments.  Countries  with  a 
democratic  government  have  not  emphasized  this  feature 
to  a  large  extent.  This  fact  has  made  it  difficult,  at  times, 
to  get  competent  men  to  fill  diplomatic  posts.  The  repret- 
sentatives  of  democratic  governments  feel  that  they  must 
follow  the  standards  which  have  been  established  by  other 
countries,  while  the  salaries  will  not  permit  them  to  do 
so  without  individual  loss.  The  consular  service  has  been 
important  in  aiding  the  development  of  commerce,  but 
this  becomes  less  necessary  as  market  conditions  become 
a  matter  of  universal  knowledge.  Much  might  still  be 
done,  however,  in  overcoming  national  prejudices  and  in 
seeking  methods  for  obtaining  a  market  for  goods  in  for- 
eign countries. 

38.  Expenditures  for  Education  Have  Been  Large. — 
The  expenditure  for  education  has  been  an  important  item 
in  all  countries,  and  in  the  different  political  divisions  of 
the  United  States.  At  present  the  actual  expenditures  of 
the  Federal  government  for  this  item  is  only  sixth  hi 
importance,  excluding  interest  and  outlay  charges.  This 
may  be  seen  by  referring  to  the  table  on  page  31,  showing 
the  expenditures  of  the  Federal  government.  This  does 
not  represent,  however,  the  importance  of  what  this 
branch  of  the  government  has  done.  Public  lands,  whose 
value  would  run  into  millions  of  dollars,  have  been  given 
to  develop  and  maintain  educational  institutions.  These 
do  not  show  on  the  expenditure  account  from  year  to 
year. 

Education  in  States  and  Cities. — The  expenses  of  educa- 
tion take  a  much  more  important  place  in  the  annual  ac- 
counts of  our  states  and  cities.  In  both  units  it  is  the 
item  of  greatest  importance.  It  has  been  a  rapidly  in- 
creasing expense  because  of  the  extension  of  the  service 


62  OUTLINES  OF  PUBLIC  FINANCE 

and  the  elimination  of  any  individual  cost.  The  public 
school  services  are  considered  of  such  importance  that 
children  are  compelled  to  avail  themselves  of  them.  To 
make  it  easier  for  the  poor  classes,  moreover,  books  and 
supplies  are  often  furnished  to  the  pupils,  while  in  a  num- 
ber of  places  noon  luncheons  are  served.  Although  the 
high  school  service  is  usually  not  compulsory,  it  is  being 
made  more  and  more  attractive  by  free  tuition,  and  free 
textbooks  and  equipment.  This  compelling  and  inducing 
more  individuals  to  take  advantage  of  a  service  has  been 
reflected  in  the  huge  sums  spent  in  giving  the  service. 
The  demand  is  growing  that  the  state  provide  forms  of 
technical  education,  since  the  old  apprenticeship  methods 
of  learning  trades  are  no  longer  available.  Many  Euro- 
pean political  units  are  emphasizing  this  part  of  the  edu- 
cational program,  and  its  influence  is  being  seen  here  in 
the  development  of  manual  training  departments  in  our 
public  and  high  schools.  We  can  expect  a  much  greater 
expenditure  along  this  line  of  development  in  the  future. 

Importance  of  Leadership. — Trained  leadership  is  essen- 
tial in  every  line  of  activity,  and  this  can  best  be  obtained 
through  educational  institutions  giving  advanced  instruc- 
tion. Many  of  our  commonwealths  have  established  such 
institutions  in  the  form  of  state  universities.  It  has  not 
been  the  practice,  however,  to  treat  this  form  of  education 
on  the  basis  of  common  benefit,  as  some  charge  is  made 
to  the  student.  The  charge  is  usually  so  small,  however, 
that  practically  the  whole  expense  is  borne  by  the  public. 
The  annual  fees  paid  by  students  in  state  universities  are 
usually  not  more  than  $50  per  year,  while  the  per  capita 
student  cost  to  the  state  runs  between  $500  and  $700. 
The  cost  of  the  service,  then,  is  largely  met  from  common 
funds.  The  returns  to  the  public  have  been  largely  in  the 
increased  agricultural,  industrial,  commercial,  and  general 
business  productiveness  which  has  come  from  this  citizen- 
ship with  higher  educational  training. 

It  has  been  suggested  that  the  state  has  not  gone  for. 


CLASSIFICATION  OF  PUBLIC  EXPENDITURES     63 

enough  in  supplying  this  service — that  it  should  undertake 
it  entirely  as  a  common  benefit,  not  only  give  the  service, 
but  grant  to  each  student  a  scholarship  fund  of  sufficient 
size  to  meet  incidental  expenses.  If,  among  the  added 
thousands  who  could  then  avail  themselves  of  this  higher 
training,  there  should  be  developed  an  Edison,  Marconi, 
or  Pasteur,  it  is  contended  the  expenditure  would  be  well 
worth  while.  Such  a  broad  educational  expenditure  for 
the  common  benefit  may  never  be  reached,  yet  there  are 
indications  of  it  in  the  numerous  scholarships  and  fellow- 
ships which  are  given  to  induce  advanced  work  in  various 
lines. 

Expenditures  of  Individuals. — The  enormous  expendi- 
tures of  Federal,  state,  and  local  governments  for  educa- 
tion do  not  tell  the  whole  story.  To  get  the  real  impor- 
tance which  is  attached  to  education,  the  expenditures  of 
individuals  and  organizations  must  be  added.  Public 
education  is  supplemented  to  a  large  extent  by  religious 
and  private  schools,  while  many  of  our  larger  universities 
and  colleges  are  privately  endowed  and  receive  no  public 
funds.  The  private  cost  of  education  added  to  the  public 
cost — the  item  of  first  importance  in  the  public  expense 
account — will  show  to  how  great  an  extent  education  is 
considered  the  need  of  first  importance  to  the  citizenship 
of  a  state. 

Experiment  Stations. — An  item  closely  connected  with 
education  is  the  maintenance  of  experiment  stations  and 
laboratories,  and  advisory  bureaus  of  various  sorts  by  the 
different  political  units.  Everyone  is  familiar  with  the 
extent  to  which  this  is  carried  in  agriculture.  Similar 
services  are  given  in  many  other  lines,  as  in  mining  and 
forestry.  The  meeting  of  the  cost  from  the  common  fund 
has  been  more  than  justified  by  the  increased  production 
at  lower  cost  in  these  various  industries. 

39.  Highways  Are  an  Important  Cause  of  Public  Ex- 
penditure.— The  expenditure  for  highways  is  one  of  grow- 
ing importance,  The  development  of  motor  transport^ 


64  OUTLINES  OF  PUBLIC  FINANCE 

tion  has  caused  an  increased  demand  for  good  roads. 
This  item  occupies  a  more  important  place  in  city  and 
state  expenditure  than  in  that  of  the  Federal  government, 
although  the  expenditure  here  is  not  inconsiderable.  The 
per  capita  expenditure  for  highways  is  much  larger  in 
cities  than  in  the  other  divisions.  In  the  future,  however, 
we  may  expect  this  item  to  occupy  a  position  of  greater 
importance  in  the  Federal  and  state  expenditure  accounts 
because  of  the  number  of  roads  to  be  built  with  the  aid 
of  these  governments. 

The  importance  of  good  roads  cannot  be  minimized  in 
commercial  and  industrial  development.  The  public 
should  be  on  the  alert,  however,  and  see  that  funds  are 
not  wasted  in  road  construction.  Contracts  have  some- 
times been  let,  through  which  the  construction  company 
received  a  certain  per  cent  of  the  cost  as  compensation 
for  services.  Such  contracts  do  not  command  efficient 
services,  nor  the  purchase  of  materials  in  the  best  markets, 
and  the  payment  from  the  public  purse  is  likely  to  be 
much  greater  than  the  service  given  in  return  warrants. 

40.  The  Regulation  of  Private  Industry  Is  an  Item  of 
Increasing  Importance. — The  reaction  from  the  laissez- 
faire  policy  is  becoming  more  and  more  marked.  This  in- 
creased government  interference  means  an  increasing  ex- 
pense. It  is  found  in  the  different  political  units,  but  is 
perhaps  more  marked  in  the  Federal  and  state  govern- 
ments. The  expenses  of  the  Interstate  Commerce  Com- 
mission, with  its  numerous  hearings  and  investigations  in 
regulating  interstate  traffic,  are  not  inconsiderable.  The 
activities  of  the  Federal  Trade  Commission,  and  of  the 
continued  increase  in  the  amount  of  government  inspec- 
tion of  privately  produced  goods,  are  other  examples  of 
the  growing  importance  of  this  service  by  the  Federal 
government. 

This  service  of  regulation  is  augmented  and  extended  by 
the  state  governments.  In  the  majority  of  states  public 
utility  commissions  seek  to  secure  for  the  public  a  satis- 


CLASSIFICATION  OF  PUBLIC  EXPENDITURES     65 

factory  service  at  a  reasonable  rate  from  the  various 
public  service  enterprises.  Here  again  numerous  costly 
hearings  and  investigations  are  necessary.  Systems  of 
inspection  are  found  in  varying  degrees  in  all  the  states. 
Among  the  most  common  are  factory  inspectors,  food  in- 
spectors, and  oil  inspectors.  Cities  often  have  inspectors 
of  various  sorts  to  carry  out  provisions  of  ordinances,  such 
as  investigating  market,  light,  or  street  conditions.  A 
part  of  their  regulatory  expenses  is  met  by  other  political 
divisions,  as  the  regulating  of  utilities  companies  through 
the  state  commission.  This  class  of  expenditure  will 
doubtless  be  of  growing  importance  as  the  public  continues 
to  become  more  exacting. 

41.  Many  Miscellaneous  Expenditures  Are  Made  for 
the  Common  Benefit. — Many  expenditures  are  made  for 
the  common  benefit  by  the  different  political  divisions 
which  will  not  fall  under  the  previous  classifications. 
While  most  of  them  are  rather  small,  the  aggregate  would 
make  no  inconsiderable  sum.  The  Federal  government 
maintains  a  currency  and  banking  system  as  well  as  a 
standard  system  of  weights  and  measures.  Commerce  is 
further  aided  by  maintaining  lighthouses,  and  navigable 
rivers  and  harbors.  National  parks  and  reserves  are  pro- 
vided for  recreation  and  experimental  purposes.  The 
amount  spent  for  health  and  sanitation  has  increased 
rapidly.  The  states  and  local  divisions  also  spend  funds 
for  many  of  the  same  things.  Recreation,  health,  and  sani- 
tation hold  important  places  in  city  expenditures,  but 
comparatively  unimportant  places  in  those  of  the  states. 
States  often  spend  funds  for  conserving  natural  resources 
and  for  giving  exhibitions,  such  as  state  fairs  for  promot- 
ing commerce  and  industry.  Many  of  this  class  of  ex- 
penditures are  found  almost  exclusively  in  municipalities. 
Among  such  are  those  for  street  lighting,  cleaning,  and 
sprinkling,  and  for  the  maintenance  of  sewers  and  public 
markets. 

A  consideration  of  the  number  and  importance  of  these 


66  OUTLINES  OF  PUBLIC  FINANCE 

expenditures,  which  are  made  without  reference  to  any 
individual  benefit,  indicates  the  social  aspect  of  the  mod- 
ern constitutional  government.  The  needs  of  the  social 
group  are  being  recognized  by  the  state,  which  is  contin- 
ually assuming  responsibilities  that  were  formerly  held  by 
individuals.  Through  the  exercise  of  its  regulatory  func- 
tions, moreover,  the  apparent  rights  of  individuals  are 
often  superseded  by  the  demands  of  social  welfare. 

42.  The  Cost  of  Providing  for  Dependents,  Defectives, 
and  Delinquents  Is  Large. — Expenditures  for  individuals, 
although  treated  as  if  they  were  for  the  common  benefit, 
are  not  as  numerous  as  the  ones  for  the  common  benefit. 
The  most  important  item  in  this  class  is  the  cost  of  caring 
for  dependents,  delinquents,  and  defectives.  A  glance  at 
the  preceding  tables  will  show  its  importance.  In  the 
state  and  Federal  expenditures  this  item  is  near  the  top, 
while  it  is  comparatively  low  in  cities.  This  is  true  be- 
cause the  other  divisions  look  after  the  cities'  needs  in 
these  matters.  The  per  capita  cost  for  cities,  however,  is 
greater  than  for  the  states. 

Public  Charity. — The  problem  of  public  charity  is  im- 
portant, not  only  from  the  standpoint  of  the  amount 
spent,  but  from  the  standpoint  of  how  it  is  spent.  Ex- 
penditures for  charity  should  be  made  so  as  to  produce  as 
few  deleterious  effects  on  the  recipient  as  possible.  If  re- 
lief is  administered  in  a  haphazard  way  the  evils  which 
were  sought  to  be  corrected  will  only  be  magnified.  Ex- 
penditures should  be  used,  whenever  possible,  to  remove 
the  cause,  so  that  they  will  not  have  to  be  repeated. 
Often  only  temporary  assistance  is  needed,  and  if  this  is 
given  in  the  right  way  future  expenditures  for  these  indi- 
viduals may  not  be  necessary.  Where  the  cause  cannot  be 
removed,  or  is  regularly  recurring,  permanent  aid  must 
be  resorted  to.  The  most  common  causes  of  the  need  for 
permanent  charities  are  the  various  sorts  of  bodily  infirmi- 
ties. The  city  and  county  almshouses  and  poor  farms  are 
widespread  evidence  of  permanent  public  charities. 


CLASSIFICATION  OF  PUBLIC  EXPENDITURES     67 

Private  Charity. — As  in  the  case  of  education,  only  a 
part  of  the  cost  of  charity  is  borne  by  the  public — perhaps 
the  smaller  part.  Other  agencies  at  work  giving  the  same 
service  are  individuals,  religious  bodies,  fraternal  organi- 
zations, and  various  forms  of  associated  charities.  There 
is  a  place  for  the  work  of  each,  but  their  energies  should 
not  be  expended  independently  of  each  other.  Each 
should  know  what  the  other  is  doing,  so  that  efforts  will 
not  be  duplicated  that  would  defeat  the  ends  in  view. 

At  best,  expenditures  for  charity  are  discouraging,  since 
causes  never  seem  to  be  removed  to  such  an  extent  that 
the  need  for  the  expenditure  decreases.  Some  laws  and 
customs  in  the  past  have  made  it  easy  for  willful  vagrants 
and  paupers  to  exploit  the  public.  It  is  needless  to  sug- 
gest that  legislation,  rather  than  to  foster  such  conditions, 
should  make  them  extremely  difficult. 

Insurance  and  Pensions. — Some  measures  are  under- 
taken by  the  state  which  are  designed  to  lessen  the  need 
for  charitable  expenditures.  Chief  among  these  are  the 
various  forms  of  compulsory  insurance.  Where  workmen 
are  required  to  deposit  a  part  of  their  wages  in  a  fund,  to 
be  returned  in  case  of  disability  or  old  age,  or  where  the 
employer  is  required  to  make  some  definite  provision  to 
compensate  for  the  accidents  or  sickness  of  his  employees, 
the  public  burden  is  often  lessened.  There  has  been  a 
rapid  extension  of  the  various  forms  of  social  insurance, 
and  it  is  possible  that  this  may  be  a  means  of  lessening 
the  amounts  spent  for  charity.  The  provisions  for  old- 
age  pensions  and  mothers'  pensions,  which  are  gradually 
being  extended,  will  likewise  tend  to  lessen  the  item  of 
expenditures  for  charity. 

Care  of  Defectives. — The  costs  for  caring  for  defectives 
and  delinquents  have  shown  a  continued  and  rapid  in- 
crease. This  is  due  not  only  to  the  increasing  numbers 
for  which  provision  must  be  made,  but  to  the  better 
services  which  are  being  given.  The  most  important  in- 
stitutions for  the  defective  class  are  those  for  the  insane, 


68  OUTLINES  OF  PUBLIC  FINANCE 

blind,  feeble-minded,  and  deaf  and  dumb.  The  heaviest 
burdens  in  the  care  of  these  classes  fall  upon  the  state 
governments.  The  greatest  cost  is  for  the  insane.  The 
figures  are  almost  startling.  In  1918,  out  of  a  total  cost 
to  the  states  for  charities,  hospitals,  and  corrections,  of 
$118,084,000,  the  amount  which  went  to  institutions  for 
the  insane  was  $49,950,000.  In  some  states  the  expendi- 
ture for  the  insane  is  larger  than  the  sum  total  of  the  ex- 
penditures for  education — a  fact  which  is  worthy  of  con- 
sideration by  serious-minded  students.  There  seems  to  be 
little  prospect  for  decreasing  the  expense  for  these  classes. 
In  fact,  as  expert  medical  treatment  is  extended  to  replace 
the  old  treatment  by  force,  costs  may  be  expected  to 
increase. 

Corrective  Institutions. — Corrective  institutions  are  of 
various  classes.  They  are  maintained  for  adults  and 
minors,  and  vary  from  Federal  prisons  to  the  village  and 
county  jails.  Expenses  for  these  institutions  have  in- 
creased, partly  because  of  increased  numbers  of  inmates, 
and  partly  because  of  attempts  to  make  them  corrective 
rather  than  mere  institutions  for  punishment.  The  possi- 
bilities for  reducing  expenditures  here,  however,  do  not 
seem  so  remote  as  in  the  cases  of  other  institutions.  In- 
mates can  be  engaged  to  a  greater  extent  than  formerly  in 
productive  labor,  and  as  society  becomes  more  advanced 
the  conditions  for  producing  and  propagating  a  criminal 
class  may  be  partially  removed. 

43.  Governments  Often  Give  Pensions  and  Bounties  to 
Individuals. — Some  form  of  the  pension  system  is  found 
in  nearly  every  country.  The  granting  of  pensions  is 
generally  undertaken  on  the  grounds  that  a  service  has 
been  given  which  has  not  been  properly  rewarded,  or  for 
the  reason  that  disability  has  resulted  because  of  services 
rendered  to  the  government  which  handicaps  the  present 
capacity  of  the  individual  for  production.  Under  the 
first  case  a  pension  should  be  regarded  as  a  payment  for 
value  received,  rather  than  as  a  gratuity.  England,  in  a 


CLASSIFICATION  OF  PUBLIC  EXPENDITURES     69 

large  measure,  has  regarded  her  pension  system  in  this 
light,  and  has  allocated  the  costs  to  the  various  govern- 
mental departments  under  which  the  recipients  have  given 
services.  In  the  United  States  the  idea  of  reward  for  dis- 
ability has  been  the  chief  ground  for  granting  pensions. 
If  this  were  legitimately  followed,  no  objections  could  be 
offered  to  our  pension  system.  The  surplus  of  funds  in 
the  United  States  in  the  'eighties  led  to  such  fraud  in  the 
granting  of  pensions,  however,  as  to  bring  the  system  into 
disrepute.  While  it  has  been  purged  of  its  grosser  evils, 
the  chance  for  politics  to  play  too  dominant  a  role  still 
remains.  The  rather  large  item  for  pensions  in  state  ex- 
penditures is  accounted  for  by  the  pensioning  of  Confed- 
erate soldiers  by  the  Southern  states. 

In  late  years  the  pension  system  has  been  extended  to 
include  others  than  those  who  have  rendered  some  special 
service  to  the  government.  The  old-age  pensions  which 
have  been  inaugurated  in  England  are  an  example  of  this 
situation.  Every  person  over  seventy  years  old,  who  is  a 
British  subject,  who  has  resided  in  the  country  a  certain 
number  of  years,  and  who  does  not  have  an  income  ex- 
ceeding a  certain  amount,  is  entitled  to  a  pension.  The 
size  of  the  pension  varies  according  to  the  income  of  the 
individual.  A  number  of  commonwealths  of  the  United 
States  have  provided  for  mothers'  pensions.  These  are 
given  on  the  ground  that  a  better  citizen  will  be  produced 
if  a  child  grows  up  under  a  mother's  care  than  if  it  is 
reared  in  a  public  institution. 

Bounties  and  Tariffs. — Government  bounties  may  take 
various  forms.  Industries  which  a  government  may 
think  desirable  may  not  be  able  to  exist  because  of  foreign 
competition  or  for  other  reasons.  The  most  common 
form  of  the  use  of  a  bounty  is  for  the  government  to  pay 
to  the  managers  of  such  industries  a  sum  sufficient  to 
enable  them  to  exist.  Some  of  the  bounties  given  by 
European  states  to  stimulate  the  production  of  sugar  are 
good  examples.  Minor  political  units  have  often  given 


70  OUTLINES  OF  PUBLIC  FINANCE 

bounties  to  stimulate  the  eradication  of  undesirable  fac- 
tors, such  as  destructive  animals. 

In  the  United  States  the  promotion  of  industry  has 
taken  another  form  than  the  straight  bounty,  though  in 
the  end  the  results  are  much  the  same.  These  ends  have 
been  secured  through  the  use  of  the  protective  tariff. 
Students  of  economics  are  familiar  with  the  arguments 
advanced  for  protection  and  with  the  method  of  its  work- 
ing. If  it  is  used  to  enable  industry  to  live,  it  must  reim- 
burse the  manager  in  some  way.  It  does  this  by  keeping 
out  competitors  and  allowing  the  price  of  products  to  rise. 
In  this  case  the  consumer  pays  directly  to  the  producer, 
while  if  the  payment  were  made  by  government  bounty 
the  collection  would  be  made  from  individuals  by  the 
government.  In  the  latter  case  the  burden  would  be  more 
widely  diffused,  since  the  collection  by  the  government 
would  not  likely  be  confined  to  the  users  of  the  product. 

44.  Some  Expenditures  Are  for  Individual  as  Well  as 
Common  Benefit. — The  most  general  governmental  service 
which  takes  account  of  both  individual  and  common  bene- 
fit is  the  maintaining  of  the  judicial  system.  The  system 
is  maintained  primarily  for  the  common  good,  yet  the 
individual  is  required  to  pay  for  the  benefit  received  when 
he  avails  himself  of  the  service. 

Judicial  System. — Governments  very  early  undertook 
the  function  of  settling  the  disputes  of  their  citizens.  At 
first  the  costs  were  borne  by  the  disputants,  but  it  grad- 
ually became  recognized  that  justice  was  so  much  of  a 
public  asset  that  the  greater  part  of  the  burden  of  securing 
it  now  rests  on  the  public.  It  would  be  unwise  to  remove 
the  entire  burden  from  the  litigants,  however,  for  it  would 
mean  the  congestion  of  the  courts  with  unimportant  cases. 

In  civil  cases  the  part  of  the  cost  to  be  borne  by  the 
individual  is  usually  placed  upon  the  one  found  at  fault. 
This  has  a  beneficial  effect  in  minimizing  unimportant 
litigation.  The  proportion  of  the  expense  borne  by  the 
state  in  criminal  cases  is  usually  much  greater  than  in 


CLASSIFICATION  OF  PUBLIC  EXPENDITURES      71 

the  civil  ones.  As  a  whole,  the  cost  of  justice  is  an  impor- 
tant item  of  expense  in  all  countries  and  all  political 
divisions.  Comparisons  are  difficult  to  make  because  of 
the  different  systems  in  vogue. 

Besides  establishing  justice,  the  judicial  system  pro- 
vides many  other  services.  It  has  become  the  function 
of  courts  to  interpret  constitutions,  and  to  pass  upon  the 
constitutionality  of  legislation.  Property  rights  are  estab- 
lished, deeds  and  mortgages  recorded,  various  sorts  of 
licenses  are  granted,  for  all  of  which  the  individual  who 
avails  himself  of  the  service  must  make  payment.  Usually 
it  is  small,  and  the  real  burden  of  the  cost  rests  with  the 
government. 

Other  Individual  Payments. — Other  examples  of  expend- 
itures of  this  class  are  in  various  kinds  of  public  improve- 
ment. Paving  streets,  building  roads,  and  constructing 
sewers,  are  common  illustrations.  Primarily,  the  improve- 
ment is  undertaken  for  the  public  benefit,  yet  obviously 
the  property  near  or  abutting  it  receives  a  benefit.  This 
is  why  abutting  lot  owners  are  asked  to  help  bear  the  cost 
of  paving  streets',  and  farmers  owning  land  along  an  im- 
portant highway  are  asked  to  help  defray  the  expenses  of 
improvements.  A  number  of  our  postal  activities  is  based 
on  the  same  method  of  expenditure.  The  cost  of  provid- 
ing this  service  in  the  more  sparsely  settled  communities 
is  much  greater  than  the  returns.  In  the  United  States 
the  importance  of  the  service  to  the  individual  has  been 
minimized,  since  the  returns  have  seldom  been  more 
than  costs,  but  generally  have  been  less.  In  a  number  of 
European  countries  the  principle  of  securing  a  net  return 
is  followed. 

45.  Some  Expenditures  Are  Primarily  for  the  Indi- 
vidual.— The  costs  of  those  industries  which  government 
units  run  on  a  commercial  basis  cannot  be  put  in  any 
of  the  previous  classes.  No  net  expenditure  is  expected 
to  result,  since  the  produce  of  the  industry  is  calculated 
to  equal  or  more  than  equal  the  expense.  Examples 


72  OUTLINES  OF  PUBLIC  FINANCE 

may  be  found  in  every  political  unit  where  industries 
have  been  undertaken  by  the  state  for  the  purpose  of 
supplying  commodities  needed  by  the  government,  or 
for  supplying  them  to  individuals  on  a  commercial  basis. 
Reference  to  some  of  the  preceding  tables  will  show  the 
importance  of  expenditures  for  public  service  enterprises. 

Some  of  the  more  important  materials  which  govern- 
ments undertake  to  furnish  for  themselves  are  military 
and  naval  supplies.  Transportation  of  goods,  passengers, 
and  messages  is  often  supplied  for  individuals.  Gov- 
ernments sometimes  maintain  monopolies,  primarily  for 
the  sake  of  the  revenue  returns.  Such  are  the  tobacco 
and  salt  monopolies  of  some  European  states.  Because 
of  the  revenue  returns  from  this  class  of  disbursements  it 
does  not  occupy  an  important  place  in  the  consideration 
of  public  expenditures. 

46.  Expenditures  Tend  to  Become  More  for  the  Com- 
mon Benefit. — The  number  of  functions  which  govern- 
ments undertake  for  the  common  good  increases  as  civili- 
zation advances.  In  some  cases  transition  from  giving  a 
service  on  the  commercial  basis  to  that  of  the  common 
benefit  has  been  rapid;  in  others  it  has  been  slower,  while 
others  are  still  in  the  process  of  change. 

The  maintenance  of  public  schools  and  highways  is  no 
longer  considered,  in  this  country,  in  any  other  light  than 
for  the  common  benefit.  It  was  not  so  long  ago,  however, 
that  neither  of  these  services  was  supplied  to  any  extent 
except  by  individuals.  Anecdotes  relating  to  the  pay  of 
the  public  school  teacher  by  the  patrons  of  the  district 
are  common.  Investigation  of  the  early  laws  of  our  states 
will  show  that  numerous  charters  were  granted  to  turn- 
pike and  highway  companies,  with  the  permission  to  erect 
tcllgates.  When  the  state  began  to  give  these  services 
individual  payments  were  still  required  for  education, 
while  tollgates  were  kept  on  the  roads.  The  charges  were 
quickly  given  up  in  the  case  of  public  schools,  and  more 
slowly  in  the  case  of  highways,  until  the  expenses  of  both 


CLASSIFICATION  OF  PUBLIC  EXPENDITURES     73 

are  now  met  from  the  common  fund.  The  postal  system 
has  changed,  in  many  cases,  from  the  basis  of  profit  to 
the  basis  of  service,  and  any  deficit  is  made  up  from  the 
common  fund.  It  is  unlikely,  of  course,  that  this  service 
will  ever  be  treated  as  purely  for  the  common  benefit. 

Many  municipal  services  are  following  the  same  trend. 
Such  are  the  supplying  of  water,  gas,  and  electricity,  where 
they  are  furnished  by  the  municipality.  While  the  ex- 
penditure for  the  common  benefit  at  present  holds  by  far 
the  most  important  place,  its  importance  will  no  doubt 
be  still  more  marked  in  the  future. 

ADDITIONAL   READING 

Census  reports: 

Financial  Statistics  of  Cities. 
Financial  Statistics  of  States. 
Wealthy  Debt,  and  Taxation. 
Statistical  Abstract  of  the  United  States. 
Edward  B.  Rosa,  "  Expenditures  and  Revenues  of  the 
Federal  Government,"  The  Annals  of  the  American  Acadj 
emy  of  Political  and  Social  Science,  vol.  xcv,  pp.  1-113. 


CHAPTER  IV 

THE  DEVELOPMENT  OF  PUBLIC  REVENUE 

47.  Most  Demands  of  the  Modern  State  Are  Monetary. 
—In  supplying  the  various  materials  and  services  which 
have  been  considered  in  the  preceding  pages,  the  state 
has  no  superhuman  power.  The  funds  required  for  these 
expenditures  must  be  secured  from  some  existing  source. 
The  two  most  imperative  needs  of  the  state  are  the  con- 
trol over  space,  from  which  it  can  direct  its  activities,  and 
the  control  over  services  and  commodities  with  which  to 
carry  out  its  desires.  The  modern  state  differs  vastly 
from  the  earlier  ones  in  the  method  by  which  this  control 
is  secured.  Under  feudalism  and  other  early  forms  of 
government  the  ownership  of  the  land  was  in  the  hands  of 
the  state,  and  the  first  mark  of  citizenship  was  obligation 
to  render  services  to  the  state.  Gradually  the  lands 
passed  into  the  ownership  of  individuals,  and  the  obliga- 
tion of  service  was  no  longer  synonymous  with  citizenship. 
The  change  has  continued  until  the  modern  state  must 
act  very  much  as  an  individual  in  supplying  itself  with 
space,  services,  and  commodities.  If  land  is  needed  for  a 
public  building  it  must  be  purchased  in  the  open  market. 
Officials  are  secured  to  carry  out  the  functions  of  the 
state  by  paying  them  salaries.  The  powers  of  the  state 
are  somewhat  stronger  than  those  of  individuals,  however, 
in  that  it  can  commandeer  land  for  its  use,  or  for  the  use 
of  individuals  it  may  designate,  through  the  right  of  emi- 
nent domain.  It  also  has  the  right  to  coerce  services  of 
its  citizens.  This  always  follows  some  well-defined  plan, 
and  may  be  extended  to  include  a  large  proportion  of  the 


THE  DEVELOPMENT  OF  PUBLIC  REVENUE       75 

citizenship,  as  in  the  case  of  conscription  for  army  and 
navy  services. 

The  best  example,  perhaps,  in  normal  times,  of  coercive 
service,  is  in  securing  men  for  juries.  This  is  a  general 
practice  in  the  United  States.  Another  form  of  coercive 
service  which  is  rapidly  disappearing  is  the  requirement 
of  a  certain  amount  of  work  for  the  maintenance  of  high- 
ways. With  few  exceptions,  then,  it  may  be  said  that  the 
demands  of  the  modern  state  are  monetary.  It  requires 
its  revenue  to  come  in  the  form  of  money,  and  uses  this 
money  to  secure  land,  services,  and  commodities  from 
individuals  or  governments,  instead  of  requiring  them  to 
be  supplied  gratuitously. 

48.  Gratuitous  Services  to  the  State  Are  Unsatisfac- 
tory^— The  unsatisfactory  character  of  gratuitous  services 
is  one  reason  why  they  are  so  little  used  at  present.  In 
the  United  States  services  are  sometimes  given  on  boards 
of  directors,  or  as  visitors  to  public  institutions,  or  occa- 
sionally as  mayors  of  small  towns.  The  motives  which 
prompt  citizens  to  offer  such  gratuitous  services  are  pa- 
triotism, distinction,  or  some  such  appeal.  That  patriot- 
ism gives  a  strong  appeal  was  evidenced  by  the  number 
and  caliber  of  some  of  the  "dollar  a  year"  men  in  the 
service  of  the  United  States  government  during  the  Great 
War. 

The  difficulty  with  most  of  the  motives  for  gratuitous 
services  is  that  they  are  not  of  sufficient  permanence  to 
insure  a  continued  efficient  service.  The  patriotic  flash 
soon  dies  with  the  passing  of  a  crisis,  while  a  position  of 
honor  may  quickly  lose  such  distinction.  Men  who  re- 
ceive nothing  for  their  services  can  hardly  be  expected 
to  give  much  in  return.  It  is  only  when  they  are  put  on 
a  "value  received"  basis  that  the  public  can  successfully 
hold  them  responsible  for  the  proper  performance  of 
duties.  The  motives  for  gratuitous  service,  moreover, 
unless  underneath  there  be  a  chance  for  individual  gain 
or  pull — and  then  the  service  ceases  to  be  gratuitous — 


76  OUTLINES  OF  PUBLIC  FINANCE 

are  ordinarily  not  strong  enough  to  call  men  with  marked 
ability.  Either  they  will  have  accomplished  their  goal  in 
private  life,  and  are  willing  to  ease  off  on  the  public,  or 
will  be  using  the  office  as  a  stepping  stone,  neither  of  which 
could  give  the  best  results.  As  a  whole,  political  units 
have  gone  to  the  basis  of  paying  for  men  to  render  the  re- 
quired service,  and  it  is  the  duty  of  the  citizenship  to  hold 
officials  responsible  for  the  proper  conduct  of  their  duties. 

49.  Public  Revenues  Received  Many  Early  Classifica- 
tions.— Almost  as  soon  as  states  began  to  rely  upon  rev- 
enues to  carry  on  activities,  those  interested  in  fiscal 
problems  became  concerned  about  the  importance  and 
justice  of  the  various  sources  of  revenues.  Bodin,  the 
French  scholar,  gave  one  of  the  most  interesting  early 
classifications.  He  enumerated  seven  sources  for  securing 
public  revenue  wlu'ch,  he  said,  included  all  that  could  be 
thought  of.  They  were:  (1)  landed  domain;  (2)  con- 
quests from  enemies;  (3)  gifts  from  friends;  (4)  tributes 
from  subject  states;  (5)  public  trading;  (6)  customs 
duties;  (7)  taxes. 

Such  a  classification  is  interesting  when  compared  with 
the  important  modern  sources  of  revenue.  Bodin  held 
that  the  revenues  from  public  domains  were  the  most 
just  and  certain,  but  that  customs  duties  were  wholly 
just.  His  reason  for  the  latter  was  the  one  commonly 
held  at  that  time — if  any  foreigner  was  to  gain  by  trading, 
let  him  pay  for  it.  Taxes  were  only  to  be  used  when  all 
other  sources  failed  to  produce  a  sufficient  amount. 

Adam  Smith  divided  revenues  into  those  coming  from 
a  fund  belonging  to  the  state,  and  from  a  fund  belonging 
to  the  citizens.  He  was  not  in  favor  of  the  state  entering 
industry,  and  believed  that  most  revenues  should  come 
from  the  citizens.  Most  of  the  other  early  fiscal  writers 
were  likewise  concerned  about  the  important  sources  of 
revenues,  and  many  of  these  sources  were  discussed,  not 
only  from  the  fiscal  point  of  view,  but  from  the  standpoint 
of  economic  principle  and  ethics  as  well. 


THE  DEVELOPMENT  OF  PUBLIC  REVENUE       77 

50.  The  Question  of  Public  Lands  Has  Been  Important. 
— The  public  domain  formerly  held  the  most  important 
place  in  the  source  of  revenues.  Much  discussion  arose  as 
to  the  wisdom  of  this,  and  the  result  has  been  that  modern 
states  have  almost  entirely  disposed  of  their  landed  pos- 
sessions. A  number  of  reasons  have  been  set  forth  why 
the  state  should  retain  these  lands,  and  also  why  the  state 
should  dispose  of  them.  The  best  summary  of  these  argu- 
ments has  been  given,  perhaps,  by  Rau,  a  German  fiscal 
writer.  Some  of  them  are  worthy  of  notice. 

Disposal  of  Public  Land. — A  state  should  give  up  its 
public  domain,  he  said,  because  it  was  not  fitted  to  enter 
industry.  In  private  hands  the  domains  would  yield  a 
larger  income  because  an  individual  owner  is  more  ener- 
getic in  seeking  to  get  profits  than  is  a  public  official.  As 
a  rule  public  officials  are  not  so  much  concerned  in  making 
improvements  in  methods  of  production  as  are  individ- 
uals. The  public  ownership  of  land,  moreover,  gives  the 
government  a  special  interest  of  its  own,  which  may  lessen 
its  activity  in  undertaking  projects  which  might  be 
needed  for  the  general  good  of  its  citizens.  Competition 
with  private  industry  might  also  lead  to  dissatisfaction. 
Experience  has  shown,  moreover,  that  states  that  have 
given  up  lands  have  had  an  ample  source  of  revenue  from 
the  citizens,  which  shows  that  the  retention  is  unnecessary. 

Retention  of  Public  Land. — On  the  other  hand,  some- 
thing may  be  said  in  favor  of  the  state  retaining  lands  so 
as  to  have  an  independent  source  of  revenue.  An  income 
from  such  a  permanent  source  can  be  depended  upon,  and 
the  state  does  not  have  to  rely  upon  legislative  enactment 
to  procure  funds.  When  legislative  enactment  is  neces- 
sary, officials  who  desire  to  gain  favor  with  a  part  of  their 
constituency  may  curtail  the  exaction  of  revenues  far  be- 
yond legitimate  needs.  Recognition  has  sometimes  been 
made  of  the  fact  that  particular  officials  may  be  hostile 
to,  or  disinterested  in,  certain  public  enterprises,  the  use- 
fulness of  which  could  be  hampered  by  retrenchment  in 


78  OUTLINES  OF  PUBLIC  FINANCE 

the  revenues  for  their  development.  To  prevent  this 
situation,  provision  is  sometimes  made  that  a  certain 
part  of  the  revenue  collected  shall  be  used  for  a  particular 
purpose,  as,  for  example,  for  the  state  university.  If  the 
citizenship  lacks  public  spirit,  moreover,  and  resents  the 
exaction  of  funds,  an  independent  source  of  revenue  might 
mean  more  harmony  within  the  state.  The  problems  of 
inequality  and  injustice,  which  arise  when  funds  are 
secured  from  individuals,  would  also  be  minimized,  it  was 
claimed. 

Public  credit  would  be  strengthened,  it  was  further 
contended,  if  the  state  had  public  lands  to  offer  as  security. 
Use  was  made  of  lands  as  a  basis  for  credit  to  a  relatively 
large  extent  in  the  early  development  of  governments. 
One  of  the  best  examples  of  the  use  and  failure  of  the 
public  domain  as  a  basis  for  credit  was  in  France,  when 
John  Law  used  it  as  the  basis  for  bank  note  circulation. 
Not  only  were  the  notes  based  upon  the  public  lands  of 
France,  but  also  upon  the  lands  in  the  Mississippi  Valley. 
Difficulty  arose,  however,  when  attempts  were  made  to 
redeem  the  notes. 

The  reasons  set  forth  for  the  state's  retention  of  public 
lands  would  have  more  weight  if  they  could  be  managed 
as  efficiently  in  the  hands  of  the  state  as  when  turned  over 
to  individuals.  This,  however,  would  seldom  be  true, 
especially  if  agricultural  pursuits  were  followed,  since 
this  form  of  industry  does  not  lend  itself  well  to  large 
scale  production.  The  state  can  draw  upon  the  resources 
of  its  citizenship,  moreover,  and  it  has  usually  gained  by 
disposing  of  its  lands  and  allowing  them  to  be  managed  by 
the  greater  efficiency  of  individuals. 

51.  The  United  States  Has  Disposed  of  Her  Public 
Lands. — More  than  three  fourths  of  the  continental  area 
of  the  United  States  has  at  some  time  been  the  property 
of  the  Federal  government.  Ownership  was  acquired  in 
various  ways.  The  original  thirteen  states  ceded  much  of 
their  claims  to  the  Federal  government.  The  Louisiana 


THE  DEVELOPMENT  OF  PUBLIC  REVENUE   79 

purchase  was  the  most  important  single  acquisition.  It 
was  purchased  from  France  in  1803  for  $15,000,000. 
Florida  was  purchased  in  1819  for  $5,000,000.  The  Ore- 
gon territoiy  was  obtained  by  treaty  in  1846.  Mexico 
ceded  a  large  portion  of  the  Southwest  in  1848,  while  a 
small  addition  was  made  by  the  Gadsden  purchase  in 
1853.  An  important  purchase  outside  the  continental  do- 
main was  that  of  Alaska  from  Russia  in  1867,  for  $7,500,- 
000.  Other  small  additions  have  been  made  in  the  form 
of  islands  located  in  various  parts  of  the  world. 

The  government  very  early  took  the  attitude  of  dis- 
posing of  its  public  lands.  About  three  fourths  of  the 
amount  of  land  which  has  passed  from  the  control  of  the 
government  has  been  in  some  form  of  a  gratuity.  A  part 
of  this  has  been  given  to  states  for  various  purposes,  some 
to  companies  and  individuals  in  order  to  foster  internal 
improvements,  while  much  has  gone  to  aid  the  develop- 
ment of  educational  institutions. 

Method  of  Disposition. — A  number  of  policies  have  been 
followed  in  the  disposal  of  public  lands.  At  first  the  at- 
tempt was  made  to  dispose  of  large  tracts  of  land  for  cash 
payment.  The  scheme  failed  because  of  the  lack  of  avail- 
able funds  for  purchasing,  and  because  land  had  not  yet 
entered  into  a  category  to  appeal  to  speculators.  The 
opposite  policy  of  the  sale  of  small  tracts  on  credit  was 
adopted  about  1800.  Greater  success  attended  this  policy, 
since  actual  cash  was  not  needed,  and  because  it  catered 
to  the  speculating  class.  The  net  result,  however,  was 
somewhat  disappointing,  since  a  considerable  amount  re- 
verted to  the  government  when  payments  could  not  be 
made.  About  1820  another  method  of  sale  was  put  into 
force.  Cash  had  to  be  paid  for  lands,  but  any  amount 
above  a  moderate  minimum  which  the  purchaser  desired 
would  be  sold.  Sales  were  slow  until  just  preceding  the 
panic  of  1837.  The  deposit  of  the  Federal  funds  in  the 
state  banks,  with  the  subsequent  multiplication  of  bank 
note  currency,  gave  an  abundance  of  cash,  while  public 

6 


80  OUTLINES  OF  PUBLIC  FINANCE 

lands  formed  a  good  speculative  investment.  This  situa- 
tion existed  until  Jackson  issued  his  " specie  circular," 
which  prohibited  the  acceptance  of  bank  notes  in  payment 
for  lands.  The  panic  soon  followed,  which,  of  course, 
stopped  all  purchases  for  the  time  being.  Since  then  an 
attempt  has  been  made  to  dispose  of  lands  to  actual  set- 
tlers under  different  preemption  and  homestead  acts. 

The  government  has  usually  tried  to  prevent  land  grab- 
bing and  the  accumulation  of  large  tracts  of  land  in  the 
hands  of  single  individuals.  This  policy  has  often  been 
frustrated  by  various  frauds  and  schemes,  and  by  the  lax 
requirements  of  the  government.  Numerous  cases  of 
fraud  have  arisen  in  securing  and  holding  claims.  Resi- 
dents of  Eastern  states  have  frequently  found  themselves 
owners  of  tracts  of  Western  lands  with  which  they  have 
had  nothing  to  do  except  permit  some  acquaintance  to 
use  their  names  in  making  the  claim.  The  most  serious 
violation,  perhaps,  of  the  principle  of  breaking  the  land 
up  into  small  plots  came  in  the  disposal  of  the  large  gifts 
made  to  the  various  states  for  educational  purposes,  and 
through  the  gifts  to  railroad  companies.  Some  individuals, 
also,  have  succeeded  in  securing  tracts  which  control  a 
much  larger  area  than  was  intended  by  the  acts  of  the 
government.  The  best  examples  of  this  are  claims  in  the 
West  which  control  the  only  available  water  for  much 
larger  areas. 

Success  of  Policy. — Congress  was  severely  criticized  for 
some  of  the  purchases  of  public  lands,  while  some  officials 
looked  upon  them  as  possible  sources  for  immense  rev- 
enues. Jefferson  looked  upon  the  Louisiana  purchase  as 
a  source  for  the  payment  of  the  national  debt.  The  poli- 
cies used  in  distributing  the  lands,  however,  precluded  the 
materialization  of  any  of  these  predictions.  On  the  other 
hand,  the  returns  from  sales  of  lands  have  lacked  more 
than  $125,000,000  of  meeting  the  expenses  which  the 
government  incurred  on  their  account.  These  expenses, 
in  part,  came  from  making  surveys,  extinguishing  Indian 


THE  DEVELOPMENT  OF  PUBLIC  REVENUE   81 

claims,  and  maintaining  the  land  offices.  An  extensive 
domain  still  exists,  but  it  is  in  large  part  the  undesirable 
land  of  the  country,  and  will  not  likely  be  any  source  of 
profit  to  the  government. 

If  the  land  policy  were  judged  on  the  business  standard 
of  profit  and  loss,  it  would  be  considered  a  failure.  From 
the  standpoint  of  expediency,  however,  in  spite  of  the 
frauds  and  evils  which  arose,  the  policy  has  been  a  wise 
one.  The  rapid  development  of  the  country  was  an  im- 
portant result  of  the  rapid  disposal  of  lands.  The  possi- 
bility of  getting  title  to  lands  caused  a  flood  of  Western 
immigration  which  would  not  have  arisen  had  the  gov- 
ernment attempted  to  retain  title  and  to  lease  the  land, 
or  to  sell  at  a  profitable  figure. 

The  grants  of  lands  to  transportation  companies  greatly 
stimulated  the  building  of  railroads,  which  did  much 
toward  hastening  the  agricultural  and  industrial  develop- 
ment. The  wealth  based  upon  the  former  public  lands 
has  increased  many  fold  since  it  has  been  turned  over  to 
individuals.  The  wealth  of  the  citizenship,  after  all,  is 
the  resources  of  the  state,  and  there  is  a  much  larger 
source  upon  which  the  government  can  draw  for  support 
than  if  it  still  retained  much  of  the  former  public  lands. 
It  is  interesting  to  speculate  whether  the  government 
would  have  been  as  able  to  meet  such  a  crisis  as  the  Great 
War  had  it  followed  the  policy  of  retaining  its  lands  as  a 
source  of  revenue. 

Policy  of  the  States. — The  policy  followed  by  the  various 
states  in  disposing  of  lands  which  were  in  their  possession 
has  been  similar  to  that  of  the  Federal  government.  To 
dispose  of  them  as  quickly  as  possible  has  seemed  to  be  the 
general  tendency,  at  least  until  a  few  years  ago.  The 
number  of  frauds  which  arose  has  led  to  a  somewhat  more 
guarded  policy  in  managing  and  distributing  what  re- 
mains. This  has  been  most  marked  with  the  forest  lands 
of  the  North,  the  swamp  lands  of  the  South,  and  the  arid 
and  mining  lands  of  the  West.  Many  statutes  may  be 


82  OUTLINES  OF  PUBLIC  FINANCE 

found  which  deal  with  the  use  and  disposal  of  such  of 
these  as  remain  in  the  hands  of  the  states,  but  as  yet  pub- 
lic industry  on  the  land  is  undertaken  to  only  a  limited 
degree.  More  is  done  to  govern  individual  ownership  and 
management. 

52.  Agitation  for  the  Public  Retention  of  Forests  and 
Mines  Has  Been  Increasing. — The  justification  of  public 
ownership  of  such  domains  as  forest  and  mineral  lands 
stands  upon  an  entirely  different  basis  from  public  owner- 
ship of  agricultural  lands.  Management  of  forestiy  and 
mining  projects  is  much  simpler  than  agriculture,  since 
these  industries  can  be  conducted  on  a  large-scale  basis  to 
a  much  greater  advantage.  From  the  standpoint  of 
securing  revenue,  a  state  would  more  likely  succeed  by 
owning  or  managing  forests  and  mines  than  agricultural 
projects. 

Importance  of  Forests  and  Mines. — The  revenue  aspect, 
however,  has  not  been  the  item  of  greatest  concern  in 
considering  the  retention  of  forests  and  mines.  Lumber 
and  minerals  are  used  up  once  and  for  all,  while  agricul- 
tural lands  continue  to  give  their  return  year  after  year. 
It  is  to  the  interest  of  the  individual  owner,  moreover,  to 
conserve  the  qualities  of  the  soil  so  it  will  continue  to  pro- 
duce as  much  as  possible.  Its  fertility  may  be  preserved 
so  that  the  soil  will  be  as  productive  for  future  generations 
as  for  those  using  it  at  present.  This  is  not  true  of  the 
other  industries  under  consideration. 

An  individual  who  owns  a  tract  of  mineral  or  forest 
land  is  interested  in  getting  an  immediate  return.  The 
method  of  production  which  will  give  this  return  will  likely 
be  the  method  used.  Little  concern  has  been  had  for 
future  generations  in  the  wasteful  consumption  of  forests 
and  minerals.  Minerals  once  used  cannot  be  replaced, 
while  the  fruition  of  reforestation  is  too  distant  to  interest 
a  particular  generation.  Since  the  products  of  forests  and 
mines  are  so  vital  to  the  life  and  development  of  society, 
and  since  individuals  are  not  sufficiently  concerned  with 


THE  DEVELOPMENT  OF  PUBLIC  REVENUE   83 

the  welfare  of  future  generations  to  seek  to  provide  a  con- 
tinuous supply,  it  seems  that  the  government  should 
undertake  this  function.  The  state  is  the  one  entity 
which  is  concerned  with  posterity  and  its  interests,  and 
should  be  relied  upon  to  see  that  future  generations  are 
properly  protected  from  the  greed  of  those  living  at 
present. 

Indirect  Effects  of  Forests. — That  forests  supply  a  useful 
product  directly  is,  of  course,  important.  Their  indirect 
effect  on  climate,  commerce,  and  industry  is  no  less  im- 
portant. Porous  forest  lands  assimilate  moisture  and 
give  it  up  gradually.  The  removal  of  the  forests  is  likely 
to  cause  disastrous  floods  in  the  winter  and  spring,  and 
serious  droughts  in  the  summer  and  autumn.  Such  a 
situation  is  a  detriment  not  only  to  agricultural  develop- 
ment, but  also  to  the  use  of  water  power  as  a  means  of 
conserving  coal.  Streams  are  a  valuable  and  cheap 
source  of  power,  which  is  greatly  lessened,  however,  if  the 
flow  is  not  reasonably  steady  throughout  the  year.  Steadi- 
ness of  volume  is  also  a  necessary  feature  of  streams 
which  are  to  be  used  as  commercial  highways.  Any  ad- 
vantage which  may  come  from  water  transportation  is 
quickly  counterbalanced  if  vessels  must  lay  up  for  a  part 
of  the  time  because  of  low  water.  These  indirect  influences 
of  forests  only  magnify  the  need  that  the  state  exercise 
its  authority  in  preserving  them  from  generation  to 
generation. 

53.  States  May  Successfully  Conduct  Some  Forms  of 
Industry. — Much  discussion  has  arisen  over  the  relative 
efficiency  of  the  management  of  industries  conducted  by 
individuals  compared  with  the  management  of  those  con- 
ducted by  the  state.  Some  countries  have  extended  their 
activities  in  these  directions  much  more  rapidly  and  ex- 
tensively than  have  others.  The  governments  of  the 
United  States  and  its  political  divisions  have  proceeded 
slowly  in  taking  up  these  operations,  yet  there  is  at  pres- 
ent much  agitation  for  government  ownership  and  opera- 


84  OUTLINES  OF  PUBLIC  FINANCE 

tion.  It  is  too  much  to  expect  that  a  government  could 
successfully  manage  every  kind  of  industry,  yet  some  may 
be  carried  on  to  better  advantage  than  others.  No  rule 
can  be  definitely  stated  which  would  mark  off  the  field 
for  state  enterprise,  yet  it  may  be  possible  to  suggest  some 
conditions  which  favor  the  success  of  state  activity  in 
industry. 

Conditions  Favorable  to  State  Management. — An  industry- 
suitable  for  state  management  must  be  one  which  can  be 
closely  watched  by  the  public.  It  is  necessarily  carried  on 
by  public  officials,  with  the  temptation  always  before  them 
of  securing  benefits  to  themselves  at  the  expense  of  the 
public.  Not  only  must  it  be  an  industry  which  can  be 
closely  observed,  but  it  must  be  one  in  which  the  public  is 
interested.  The  managing  officials,  otherwise,  will  not  be 
held  responsible  for  the  method  in  which  the  business  is 
conducted.  An  industry  which  has  reached,  or  nearly 
reached,  its  final  stage  in  development  is  better  fitted  for 
government  management  than  a  new  industry  in  which 
much  progress  is  needed  to  make  it  efficient.  State  officials 
do  not  have  the  same  motives  for  progress  and  efficiency 
as  individual  entrepreneurs,  since  the  returns  of  the  busi- 
ness are  the  rewards  to  the  latter,  while  the  former  receive 
a  salary  for  their  services.  A  mature  industry  has  the 
further  advantage  that  the  necessary  operations  have 
been  standardized  so  that  it  is  comparatively  easy  to 
assign  definite  tasks  for  which  the  employees  can  be  held 
responsible.  In  a  new  and  progressive  industry,  the  entire 
method  of  operation  may  change  every  few  years,  while 
different  aspects  are  continually  in  the  process  of  change. 
This  makes  it  difficult  to  secure  men  to  be  held  accountable 
for  particular  tasks.  While  many  individual  exceptions 
doubtless  exist,  as  a  general  proposition,  however,  the 
government  will  be  more  successful  in  managing  a  mature 
industry  than  one  in  the  formative  stage. 

54.  The  Post  Office  Is  a  Good  Example  of  Government 
Enterprise. — Some  enterprises  seem  to  fall  naturally  to 


THE  DEVELOPMENT  OF  PUBLIC  REVENUE   85 

government  management — in  fact,  so  naturally  that  the 
situation  that  they  are  really  government  enterprises  is 
often  lost  sight  of.  The  postal  systems  of  various  countries 
give  the  best  example,  perhaps,  of  an  industry  conducted 
by  the  government.  The  postal  system  is  so  generally 
conducted  by  the  government  that  the  possibility  of  its 
existence  under  individual  management  is  scarcely  given 
a  thought.  Not  only  is  it  one  of  the  most  general  forms  of 
public  industry,  but  one  of  the  oldest.  Adam  Smith  re- 
ferred to  it  as  the  only  mercantile  project  which  had  been 
successfully  managed  by  every  sort  of  government. 

The  beginnings  of  postal  systems  were  usually  with  in- 
dividuals connected  with  mercantile  pursuits.  Messages 
were  sent  from  establishment  to  establishment  by  a  run- 
ner, who  gradually  acquired  the  habit  of  carrying  messages 
for  individuals  who  were  along  his  route.  An  exception 
to  this  was  the  postal  system  which  the  Romans  estab- 
lished as  an  adjunct  to  the  military  organization.  As  a 
whole,  however,  the  system  had  very  little  development 
before  it  was  taken  over  by  the  government  in  various 
countries. 

After  the  postal  system  became  a  government  monopoly 
a  number  of  changes  were  made  in  rates  of  charges,  and  in 
the  method  for  their  determination.  Charges  at  first  were 
generally  very  high,  and  distance  of  carriage  was  an  im- 
portant factor  to  be  considered  in  fixing  the  rate  of  charge. 
Gradually,  however,  rates  were  lowered,  weight  became 
the  sole  basis  for  the  charge,  while  payment  was  made  by 
affixing  stamps.  It  might  be  said  that  the  postal  system 
had  assumed  its  present  form  by  1850.  While  rates 
within  the  various  countries  were  gradually  reduced, 
cheap  international  postal  rates  came  slowly.  The  recent 
establishment  of  the  Postal  Union  has  secured  lower  rates 
among  the  countries  which  are  members. 

Postal  System  in  the  United  States. — The  growth  of  the 
postal  system  in  the  United  States  has  followed  the  gen- 
eral trend  of  development  of  this  enterprise.  Acts  passed 


86  OUTLINES  OF  PUBLIC  FINANCE 

by  the  Mother  country  provided  for  a  Colonial  postal  sys- 
tem. A  three-cent  rate  was  adopted  in  1851,  and  a  two- 
cent  rate  in  1883.  Distance  as  a  basis  of  charge  was  given 
up  comparatively  early,  and  weight  with  payment  by 
stamp  was  adopted.  This  has  no  doubt  imposed  a  burden 
upon  some  parts  of  the  country  at  the  expense  of  other 
parts.  If  statements  could  be  secured  which  would 
separate  the  postal  revenues  and  expenditure  of  the  part 
of  the  country  east  of  the  Mississippi  from  those  of  the 
territory  west  of  this  line,  there  is  no  doubt  that  the 
eastern  part  would  show  a  substantial  surplus,  while  the 
western  part  would  show  a  large  loss.  It  appears  the 
people  in  the  more  thickly  settled  part  of  the  country  are 
paying  an  excessive  price  for  their  service,  while  the  more 
sparsely  settled  regions  are  securing  services  at  less  than 
cost,  with  the  deficits  paid  by  the  former  class.  If  all  the 
indirect  gains  were  considered,  however,  which  have  come 
to  the  eastern  population  because  of  the  rapid  develop- 
ment which  a  cheap  postal  service  has  fostered,  it  would 
no  doubt  be  quite  evident  that  all  expenditures  for  main- 
taining the  system  have  been  very  remunerative. 

Motives  for  Conducting  Postal  System. — The  aims  which 
a  state  may  have  in  view  in  conducting  the  postal  system 
are  not  the  same  in  different  countries,  nor  in  the  same 
country  at  different  times.  In  the  earlier  periods  the  idea 
of  securing  revenue  predominated,  while  the  claim  of  pub- 
lic service  received  little  consideration.  In  that  part  of 
the  service  where  the  government  has  a  monopoly,  as  in 
carrying  letters,  the  charge  will  be  comparatively  high, 
while  in  the  part  of  the  service  where  there  may  be  com- 
petition, as  in  carrying  parcels,  the  rates  will  be  fixed  more 
on  a  competitive  basis. 

There  has  been  a  tendency  to  minimize  the  importance 
of  securing  the  largest  possible  revenue,  however,  while 
public  service  has  been  given  greater  consideration.  It 
is  at  present  the  policy  of  no  country,  perhaps,  to  secure 
more  than  a  good  business  profit,  while  some  Attempt  to 


THE  DEVELOPMENT  OF  PUBLIC  REVENUE   87 

conduct  the  industry  on  a  cost  basis,  or  even  run  with  a 
deficit  which  must  be  made  up  from  the  common  treasury. 
France  and  England  usually  receive  a  substantial  profit, 
while  the  United  States  has  practically  attempted  the  cost 
basis,  although  in  a  majority  of  years  a  deficit  has  ap- 
peared. Before  1819,  in  the  United  States,  the  annual 
revenues  exceeded  expenditures,  while  a  deficit  appeared 
for  more  than  half  of  the  next  thirty  years.  This  whole 
period  showed  a  slight  deficit,  while  a  deficit  has  occurred 
in  practically  every  year  since  1850.  During  the  Great 
War  the  revenue  aspect  received  more  emphasis.  Rates 
were  raised,  and  distance  was  adopted  as  a  factor  in  de- 
termining the  postage  upon  second  class  matter.  Since 
the  war  the  letter  rates  have  been  reduced,  and  as  expend- 
itures assume  more  normal  proportions  the  zone  system 
of  charge  for  second  class  mail  will  doubtless  be  repealed. 

55.  States  Enter  Many  Fields  of  Activity. — The  owner- 
ship and  management  of  the  postal  system  is  perhaps  the 
oldest  and  most  general  of  government  enterprises,  yet 
modern  state  activities  reach  into  many  other  fields. 
Many  causes  have  contributed  to  the  development  of  this 
situation.  The  success  which  attended  the  various  states 
in  the  management  of  the  postal  system,  whatever  the 
aim  primarily  in  view,  soon  led  to  the  conclusion,  among 
certain  classes,  that  the  state  could  be  just  as  successful 
in  other  lines  of  endeavor.  The  doctrine  of  laissez  faire, 
moreover,  under  which  competition  was  expected  to  work 
out  justice  in  charges  and  services,  soon  proved  to  be  un- 
satisfactory. This  became  increasingly  true  in  the  indus- 
tries with  which  the  public  is  most  deeply  interested — the 
public  utilities.  From  factors  inherent  in  the  nature  of 
their  business,  competition  is  destructive,  and  combina- 
tions and  trade  agreements  soon  began  to  appear. 

Public  ownership  has  been  proposed  as  one  method  of 
escape  from  the  abuses  perpetrated  by  these  monopolies. 
It  has  been  carried  much  farther  in  some  countries  than 
in  others.  In  many  European  states  the  telegraph,  tele- 


88  OUTLINES  OF  PUBLIC  FINANCE 

phone,  railroad,  and  express  companies  are  owned  and 
operated  by  the  government.  In  the  United  States  these 
industries  still  remain  under  individual  management  in 
spite  of  increased  agitation  and  pressure  from  certain 
classes  for  government  ownership.  The  extension  of  the 
postal  system  to  the  carrying  of  parcels  has  made  the 
government  a  competitor  with  express  companies,  while 
the  extensive  regulation  through  the  Interstate  Commerce 
Commission  and  the  numerous  state  public  utility  com- 
missions substantially  limits  the  activities  of  the  individual 
enterpriser. 

56.  Public  Ownership  Has  Had  Most  Rapid  Extension 
in  Municipalities. — The  larger  governmental  units  of  the 
United  States,  as  has  been  indicated,  have  been  slow  in 
developing  public  industries.  The  opposite  tendency  has 
been  shown  in  the  municipalities,  especially  in  the  smaller 
ones.  The  waterworks  very  early  began  to  be  taken  over 
by  the  cities,  and  the  policy  has  grown  until  at  present 
comparatively  few  individuals  are  supplying  water  for 
cities.  A  few  large  cities  have  taken  over  the  task  of  sup- 
plying gas  and  electricity,  yet  unqualified  success  has 
not  crowned  the  efforts.  Cases  have  arisen  where  failure 
was  so  marked  that  the  plants  have  been  turned  back  to 
private  management.  In  the  smaller  cities,  however,  ex- 
tension of  ownership  has  been  much  more  rapid.  Not 
only  is  the  supply  of  nearly  all  the  water  furnished  from 
public  plants,  but  the  cities  have  frequently  undertaken 
to  supply  a  number  of  other  utilities.  In  some  cases  the 
success  has  been  certain;  in  others,  doubtful,  while  failure 
has  sometimes  resulted.  Instances  in  which  smaller  cities 
have  given  such  industries  over  to  individuals  are  infre- 
quent, which  would  lead  to  the  belief  that  the  experiment 
has  been  fairly  satisfactory. 

Reasons  for  Municipal  Industries. — The  reasons  for  the 
rapid  municipalization  of  industries  are  not  far  to  seek. 
Competition  naturally  gave  way  to  monopoly,  followed 
by  an  exploited  public.  Antagonistic  public  sentiment 


THE  DEVELOPMENT  OF  PUBLIC  REVENUE   89 

was  quickly  aroused,  in  the  development  of  which  the 
public  press  played  an  important  part.  A  number  of 
magazines  devoted  to  municipal  problems  rapidly  came 
to  the  front,  which  supplemented  the  agitation  already 
carried  on  by  numerous  newspapers.  State  legislatures 
influenced  the  development  by  facilitating  the  acquisition 
of  the  industries  by  the  cities.  Debt  limitations  frequently 
have  been  lifted  so  that  bonds  could  be  issued  for  con- 
struction or  purchase. 

The  above  factors  have  not  only  caused  a  rapid  exten- 
sion of  municipal  ownership,  but  have  had  a  salutary 
effect  upon  the  individuals  who  continue  to  operate  public 
utilities,  in  that  more  consideration  is  given  to  the  wishes 
of  the  public.  Where  this  results  in  a  satisfactory  agree- 
ment between  the  operator  and  the  public,  the  desire  for 
public  ownership  may  be  indefinitely  postponed.  The 
inauguration  of  regulation  by  public  boards,  in  so  far  as 
this  succeeds  in  securing  just  relations  between  the  public 
and  the  individuals  or  corporations  supplying  its  utilities, 
will  postpone  and  weaken  the  desire  for  municipal  owner- 
ship. 

However  successful  public  management  has  been,  it 
does  not  indicate  that  a  rapid  extension  may  be  expected. 
The  agitation  has,  perhaps,  done  much  to  accomplish  its 
purpose  through  the  changes  in  the  service  given  by  indi- 
viduals, and  the  past  successes  of  public  ownership  sug- 
gest a  plausible  alternative  if  the  desired  results  cannot  be 
obtained  through  private  management. 

57.  Revenue  Has  a  Place  of  Relatively  Small  Impor- 
tance in  Modern  Public  Enterprise. — It  has  been  indicated 
that  the  post  office  may  be  conducted  with  a  number  of 
ends  in  view.  The  same  may  be  said  of  public  industries 
in  general.  The  revenue  aspect  first  held  an  important 
place,  such  as  it  still  holds  in  the  tobacco  and  salt  monop- 
olies of  some  European  countries.  The  general  trend, 
however,  has  been  to  emphasize  the  service  aspect,  and 
with  this  in  mind  net  revenues  have  often  disappeared, 


90  OUTLINES  OF  PUBLIC  FINANCE 

and  deficits  have  to  be  made  up  from  the  general  fund. 
Such  a  situation  does  not  indicate  that  the  conduct  of  the 
industry  has  been  a  failure,  because  success  is  not  always 
to  be  measured  in  financial  returns.  The  postal  system  of 
the  United  States  must  be  considered  a  success  in  that  it 
has  been  a  factor  for  the  cheap  dissemination  of  informa- 
tion, even  though  there  has  been  a  financial  deficit. 

Highways  were  once  conducted  with  the  idea  of  getting 
at  least  some  return,  yet  the  public  tollgate  is  an  institu- 
tion that  most  members  of  the  younger  generation  have 
never  seen.  The  maintenance  of  highways,  moreover,  is 
not  branded  as  a  failure  because  no  revenue,  gross  or  net, 
is  received.  Municipal  waterworks,  while  they  have 
never  been  conducted  on  the  same  principle  as  highways, 
frequently  tend  in  this  direction.  Deficits  often  occur, 
not  because  the  enterprise  could  not  be  made  financially 
successful,  but  because  the  aim  in  view  has  been  to  give  a 
service  at  a  low  cost.  In  measuring  the  success  of  a  public 
industry,  then,  the  aim  with  which  it  is  conducted  must 
always  be  considered.  In  most  cases  the  fiscal  aim  has 
been  superseded  by  the  desire  to  give  a  public  service. 

58.  The  United  States  Census  Bureau  Classifies  Rev- 
enues.— The  classification  of  revenues  which  is  used  by 
the  census  bureau  is  similar  to  its  classification  of  expend- 
itures, in  that  it  is  largely  for  mechanical  purposes.  The 
reports  must  be  based  upon  official  records,  and  since 
there  is  a  lack  of  uniformity  in  the  various  political  divi- 
sions, a  detailed  classification  would  be  impossible.  Only 
a  broad  statement  of  receipts,  therefore,  has  been  at- 
tempted. A  number  of  classes  have  been  formed  with  a 
definite  meaning  assigned  to  the  terms  used  to  designate 
them.  The  meaning  assigned  has  been  taken  from  the 
usage  of  the  best  authorities  on  fiscal  problems,  modified 
in  particular  instances  by  some  special  requirement. 

Revenue  Receipts. — The  two  primary  classes  of  revenues 
correspond  to  the  two  primary  classes  of  expenditure. 
They  a.re  revenue  receipts  an4  norjreyenue  receipts,  The 


THE  DEVELOPMENT  OF  PUBLIC  REVENUE       91 

former  applies  to  all  money  and  wealth  received  by  gov- 
ernmental bodies  which  increase  the  aggregate  assets  with- 
out increasing  the  liabilities.  Under  this  head  the  follow- 
ing items  are  listed,  a  detailed  discussion  of  which  will  be 
taken  up  in  succeeding  chapters:  general  property  taxes; 
special  property  taxes;  poll  and  occupation  taxes;  special 
assessments;  business  and  income  taxes;  business  license 
taxes;  nonbusiness  license  taxes;  fines,  forfeits,  and 
escheats;  highway  privileges;  interest  and  rents;  sub- 
ventions and  grants;  donations  and  gifts;  earnings  of 
general  departments;  and  earnings  of  public  service 
enterprises. 

Nonrevenue  Receipts. — The  class  of  nonrevenue  receipts 
is  described  by  the  census  bureau  as  follows:  "The  term 
nonrevenue  receipts  is  applied  to  all  receipts  of  a  civil 
division  other  than  its  revenue  receipts,  as  previously 
defined.  The  nonrevenue  receipts  of  a  fiscal  year  of  any 
civil  division  comprise  all  receipts  recorded  during  the 
year  from  (1)  sales  of  investments  and  of  supplies  which 
have  been  purchased  for  sale;  (2)  issue  of  debt  obligations 
and  transactions  which  increase  the  indebtedness  without 
the  issue  of  formal  debt  obligations;  (3)  trust  and  agency 
transactions;  (4)  receipts  offsetting  outlays,  as  the  col- 
lections of  insurance  to  be  applied  to  the  reconstruction 
of  destroyed  property,  refunds  of  erroneous  payments, 
and  receipts  in  error;  and  (5)  such  counterbalancing  re- 
ceipts as  transfers  between  the  funds  or  divisions  of  the 
governmental  unit."  From  the  nature  of  the  items  in 
this  second  classification,  it  is  readily  seen  that  it  occupies 
a  place  of  comparative  unimportance.  In  so  far  as  the 
discussion  of  succeeding  chapters  deals  with  revenue, 
therefore,  the  revenue  receipts  will  occupy  a  place  of  much 
greater  importance  than  nonrevenue  receipts. 

59.  Statistics  Show  the  Rapid  Growth  in  Revenues 
Secured  by  Governments. — The  lack  of  uniformity  in 
fiscal  systems  of  the  various  governmental  bodies  makes 
it  difficult  to  get  accurate  comparative  statistical  data. 


92 


OUTLINES  OF  PUBLIC  FINANCE 


The  census  reports  on  the  revenues  of  the  Federal  govern- 
ment and  of  the  states  are  accurate  enough,  however,  to 
show  the  rapid  growth  in  the  amount  of  funds  secured. 
The  following  table  shows  the  revenue  receipts  of  the 
Federal  government  for  1903  and  1913,  the  last  year  which 
can  strictly  be  classed  as  a  year  of  normal  operations.1 

REVENUE  RECEIPTS  OP  THE  FEDERAL  GOVERNMENT 


1903 

1913 

Special  Property  Taxes  

$281,612,000 

$313,953,000 

Poll  Taxes 

1,356  000 

4721  000 

Business  Taxes 

42,064,000 

113,385  000 

Liquor  Licenses  and  other  Imposts.  . 
Other  Business  Licenses  

179,501,000 
84,000 

230,146,000 
206,000 

Fines,  Forfeits,  and  Escheats  

835,000 

2,444,000 

Interest  and  Rents. 

997,000 

44,000 

Earnings  of  General  Departments, 
and  Miscellaneous  

16,658,000 

17,994,000 

Earnings  of  Public  Service  Enter- 
prises .  . 

134.224.000 

270.704.000 

It  is  seen  from  this  table  that  from  only  one  source  the 
revenue  was  less  in  1913  than  it  was  in  1903.  The 
total  increase  is  a  little  less  than  50  per  cent.  The  interest 
of  the  table  will  be  enhanced  by  briefly  noting  the  signifi- 
cance of  the  items.  The  important  item  under  special 
property  taxes  is  the  customs  receipts.  The  tax  on  the 
circulation  of  national  bank  notes  and  some  other  small 
items  are  included.  The  four-dollar  levy  upon  each  alien 
entering  the  United  States  makes  up  the  bulk  of  the  poll 
tax.  Business  taxes  consist  of  the  internal  revenue  collec- 
tions other  than  those  from  liquor.  The  returns  from  the 
income  tax,  since  its  inauguration,  are  also  included  here. 

The  receipts  from  taxes  upon  liquor  comprise  the  re- 
turns under  liquor  licenses  and  other  imposts,  while  the 
amount  received  from  certain  liquor  and  trade  licenses  in 
Alaska  comprise  other  business  licenses.  The  important 
source  of  interest  is  the  amount  paid  by  banks  on  govern- 

1  See  note  p.  31. 


THE  DEVELOPMENT  OF  PUBLIC  REVENUE   93 


ment  deposits.  Formerly  the  government  owned  a  num- 
ber of  industrial  securities,  principally  railroad,  which 
were  interest-bearing,  and  which  helped  to  swell  this  item. 
Many  items  go  to  make  up  the  earnings  of  the  general 
departments.  Some  of  the  more  important  included  in 
these  earnings  are  the  returns  from  the  consular,  patent, 
and  land  offices,  rents  of  buildings  and  grounds,  receipts 
from  the  sale  of  materials,  profits  on  coinage,  and  receipts 
from  forest  reserves.  The  earnings  from  public  service 
enterprises  include  such  items  as  the  postal  receipts  and 
returns  from  the  Panama  Canal. 

Revenues  of  States. — The  principle  sources  of  the  rev- 
enues for  the  various  states,  together  with  the  increase 
for  the  period  from  1903  to  1913,  may  be  seen  from  the 
following  table: 

TOTAL  AND  PER  CAPITA  REVENUES  OP  THE  STATES 


1903 

1913 

Total 

Per 
Capita 

Total 

Per 
Capita 

General  Property  Taxes  

$  82,320,000 

$1.02 

$139,750,000 

$1.44 

Special  Property  Taxes  
Poll  and  Occupation  Taxes  
Special  Assessments  and  other 
Special  Charges 

24,990,000 
2,232,000 

3,737,000 

0.31 
0.03 

0  05 

67,676,000 
2,965,000 

6,455  000 

0.70 
0.03 

0  07 

Business  and  Income  Taxes  .  .  . 
Liquor  Licenses  and  Imposts.  . 
Other  Business  Licenses 

27,129,000 
9,750,000 
8,607,000 

0.34 
0.12 
0  11 

53,642,000 
20,993,000 
8  589  000 

0.55 
0.21 
0  09 

Nonbusiness  Licenses 

205,000 

6,451  000 

0  07 

Fines,  Forfeits,  and  Escheats.  . 
Interest  and  Rents 

431,000 
10  942  000 

0.01 
0  14 

1,428,000 
21  300  000 

0.01 
0  22 

Subventions  and  Grants  .  . 

2,703,000 

0  03 

3,191  000 

0  03 

Donations  and  Gifts  

127,000 

435,000 

Earnings  of  the  General  De- 
partments 

12,809,000 

0  16 

32  995  000 

0  34 

Earnings  of  Public  Service  En- 
terprises   

3,184,000 

0.04 

1,785,000 

0.02 

This  table  shows  that  practically  every  source  of  revenue 
gave  substantially  larger  returns  in  1913  than  in  1903. 
In  both  years  the  sources  of  outstanding  importance  were 
the  general  property  tax,  special  property  tax,  and  taxes 


94  OUTLINES  OF  PUBLIC  FINANCE 

upon  business  and  income.  Receipts  from  inheritance 
taxes  are  placed  with  the  special  property  taxes.  The 
remarkable  increase  in  nonbusiness  license  taxes  is  due 
to  the  general  practice  of  licensing  automobiles.  The 
large  decrease  in  returns  from  public  enterprises  can  be 
explained  in  a  measure  by  South  Carolina  giving  up  the 
state  dispensary  method  of  handling  liquor. 

It  must  be  remembered  that  this  is  a  general  table 
showing  the  combined  figures  of  forty-eight  states.  The 
tendency  for  particular  states  might  be  entirely  different 
from  the  general  results.  A  study  of  the  general  property 
tax  in  the  states,  for  example,  will  show  that  in  some  cases 
it  is  becoming  of  comparatively  little  importance  as  a 
source  of  state  funds.  Likewise  many  states  show  a 
decrease  in  a  number  of  the  items  hi  spite  of  the  increase 
indicated  by  the  combined  figures. 

60.  The  Majority  of  Modern  Revenue  Is  Secured  by 
Compulsion. — Revenue  systems  have  gone  through  a  long 
process  of  development,  and  it  is  only  in  recent  years 
that  they  have  assumed  their  present  form.  The  early 
state  scarcely  functioned  so  as  to  commend  itself  for  sup- 
port by  its  citizens.  Revenues  had  to  be  secured  from 
independent  sources,  such  as  public  lands.  These  soon 
became  inadequate,  and  the  public  consciousness  had  not 
been  sufficiently  aroused  to  permit  the  direct  exaction  of 
funds  from  the  citizens.  Roundabout  methods  had  to  be 
used,  such  as  claiming  a  payment  for  a  more  or  less  ficti- 
tious service,  or  by  the  use  of  taxes,  the  burden  of  which 
was  hidden  by  their  indirectness.  It  has  only  been  with 
the  development  of  a  high  sense  of  individual  responsi- 
bility in  public  affairs  that  the  state  has  made  compulsory 
levies  upon  individuals  and  property  without  creating  a 
disastrous  antagonism. 

Historical  Development. — Various  writers  have  traced 
the  historical  development  of  the  idea  of  compulsion. 
The  available  sources  of  funds  often  proved  insufficient 
and  the  citizenship  had  to  be  relied  upon  to  meet  the 


THE  DEVELOPMENT  OF  PUBLIC  REVENUE       95 

need.  That  it  was  looked  upon  as  a  gift  to  the  state  is 
evidenced  by  the  terms  donum  and  benevolence,  the  desig- 
nations by  which  the  first  payments  by  citizens  were 
known.  That  the  state  had  to  implore  help  at  times  is 
shown  by  the  fact  that  revenues  sometimes  were  called 
prcecarium  and  bede.  The  idea  that  the  state  had  a  right 
to  expect  assistance  from  its  citizenship,  or  that  the  citi- 
zens should  be  under  obligation  to  sacrifice  anything  for 
the  welfare  of  the  state,  did  not  develop  until  later.  That 
these  ideas  did  develop,  however,  is  shown  by  such  rev- 
enues as  the  aid,  steuer,  and  duty.  The  more  modern  stage 
was  reached  when  the  right  of  the  state  to  assess,  levy, 
and  collect  funds  from  its  citizenship  became  recognized. 
The  use  of  such  expressions  as  impost  and  tax  marks  the 
beginning  of  this  modern  situation,  in  which  the  citizen 
is  so  interested  in  the  welfare  and  activities  of  the  state 
that  he  will  consent  to  pay  the  levies  that  are  placed  upon 
him. 

English  Poor  Rates. — An  interesting  example  of  this  de- 
velopment is  found  in  the  poor  rates  of  England.  It  be- 
came'necessary,  very  early,  that  the  state  give  assistance 
to  the  poor,  and  funds  had  to  be  secured.  At  first  volun- 
tary contributions  were  made.  It  was  not  long  until  the 
amount  secured  by  this  means  was  insufficient,  and  the 
authorities  were  instructed  to  prosecute  those  who  had 
not  contributed.  This  did  not  succeed  in  getting  what 
was  considered  a  just  amount  from  the  various  contribu- 
tors, and  power  was  conferred  upon  the  justices  of  the  peace 
to  determine  what  would  be  considered  a  reasonable  con- 
tribution, and  if  it  were  not  made,  prosecution  was  likely 
to  follow.  The  next  change  was  to  that  of  regular  levies, 
with  a  compulsory  payment  of  the  amount.  This  policy 
has  continued  to  be  used  to  the  present. 

Motives  Beneath  Modern  Revenues. — Many  of  the  mo- 
tives suggested  in  this  sketch  of  the  development  of 
revenues,  no  doubt,  are  still  active.  Gifts  still  form  a 
part  of  the  revenue  of  most  governmental  units,  either  as 


96  OUTLINES  OF  PUBLIC  FINANCE 

a  conscience  fund  or  for  the  building  or  endowing  of  some 
public  institution.  The  feeling  of  obligation,  moreover, 
often  prompts  payments  for  particular  purposes.  The 
state  may  still  receive  returns  from  the  conduct  of  indus- 
try, the  products  of  which  are  purchased  by  the  citizens 
of  their  own  volition.  Yet  the  sum  total  of  these  would 
form  a  small  share  of  the  income  of  the  modern  state,  for 
the  greater  part  of  the  amount  received  would  doubtless 
remain  with  the  individual  if  he  were  not  compelled  to 
turn  it  over  to  the  public  treasury.  Even  the  modern 
sense  of  public  duty  has  not  been  developed  to  such  an 
extent  that  all  state  activities  would  be  supported  by 
voluntary  contributions.  It  will  be  the  various  classes  of 
these  compulsory  exactions  with  which  the  succeeding 
chapters  will  deal  most  extensively. 

ADDITIONAL  READING 

Bullock,  Readings  in  Public  Finance,  chaps,  iv,  v,  vi. 


CHAPTER  V 

TAXATION 

61.  Many  Ideas  of  Taxation  Are  Inaccurate. — To  the 
layman  a  tax  is  any  compulsory  payment  made  to  a  po- 
litical division,  or,  very  often,  to  other  institutions.  Stu- 
dents of  fiscal  problems,  however,  cannot  accept  this  broad 
characterization,  but  must  make  a  differentiation  between 
the  compulsory  payments  to  the  state  and  other  compul- 
sory payments. 

Definition  of  Taxes. — A  number  of  attempts  have  been 
made  to  define  taxes,  many  of  which  leave  something  to 
be  desired.  The  idea  of  compulsion  is  general.  Various 
ideas  as  to  method  and  purpose  of  the  levy  have  been 
given.  Such  ideas  as  the  following  may  be  found  in 
analyzing  the  definitions  of  various  writers:  Taxes  are 
legally  collected  contributions  for  meeting  necessary  and 
general  expenses;  taxes  are  proportional  contributions 
levied  on  property;  taxes  are  for  the  purpose  of  meeting 
public  needs;  taxes  are  for  the  purpose  of  meeting  the 
expenses  of  government;  taxes  are  one-sided  transfers 
with  the  intention  that  a  common  burden  will  be  main- 
tained. 

A  little  inquiry  into  the  nature  of  the  levy  of  taxes,  and 
the  purposes  for  which  they  are  used,  will  show  the  in- 
sufficiency of  these  statements.  Many  examples  could 
be  given  of  where  the  funds  collected  from  taxes  have 
been  used  for  other  than  the  necessary  and  general  ex- 
penses of  the  government.  In  the  ancient  autocratic  state 
the  funds  collected  were  often  used  to  subserve  the  private 
ends  of  the  ruler.  The  same  is  equally  true  in  such  mod- 
ern states  as  Turkey.  In  any  state,  however,  it  is  not 


98  OUTLINES  OF  PUBLIC  FINANCE 

difficult  to  find  expenditures  from  the  common  fund  which 
have  been  so  extravagant  as  to  be  worse  than  useless. 
Many  of  the  familiar  "pork  barrel"  appropriations  of  our 
Congress  are  of  this  nature. 

Taxes,  moreover,  are  frequently  used  for  other  than 
public  purposes.  Numerous  examples  may  be  found  where 
funds  from  the  common  treasury  have  been  used  to  aid 
individuals  or  groups  of  individuals  in  distress.  In  times 
of  fire,  flood,  famine,  and  pestilence,  the  purse  of  political 
units  has  often  been  called  upon  to  furnish  relief.  Wealth, 
moreover,  is  not  the  only  criterion  which  may  be  taken  as 
the  basis  for  the  tax  levy.  The  wide  use  of  poll  taxes,  es- 
pecially in  earlier  revenue  systems,  is  evidence  of  this. 
While  a  tax  is  not  to,  be  expended  for  the  direct  individual 
benefit  of  the  one  by  whom  it  has  been  paid,  it  does  not 
necessarily  convey  the  idea  that  the  transfer  is  one-sided. 
The  prevalence  of  such  an  idea  would  no  doubt  have  the 
effect  of  making  taxes  very  much  more  unpopular  than 
they  now  are. 

A  proper  definition  of  a  tax,  then,  must  be  broad  enough 
to  include  many  of  the  suggestions  in  the  above  paragraph, 
and  yet  narrow  enough  to  exclude  voluntary  payments, 
and  those  through  which  the  one  who  makes  payment 
expects  to  get  a  direct  benefit  from  the  expenditure  of  the 
fund.  The  following  definition  is  suggested  as  one  which 
meets  these  requirements.  A  tax  is  a  compulsory  contribu- 
tion, exacted  by  public  authority  according  to  some  general 
rule,  without  reference  to  any  special  benefit  conferred  by  the 
expenditure  of  the  funds  so  exacted.  This  definition  allows 
that  a  state  may  collect  funds  from  any  source,  so  that 
some  general  rule  is  followed,  and  that  the  expenditure 
may  be  for  any  purpose  that  the  spending  authorities 
may  desire. 

62.  Some  Terms  Used  in  Connection  with  Taxes  Are 
Important. — It  is  important  that  the  student  of  fiscal 
problems  know  the  meaning  of  a  number  of  terms  used  in 
connection  with  taxes.  Some  of  the  more  important  are 


TAXATION  99 

base,  rate,  ad  valorem,  specific,  customs  duties,  excise 
duties,  shifting  and  incidence,  levy,  assessments,  and  tax 
list. 

The  base  is  the  thing  or  circumstance  upon  which  the 
tax  is  computed.  The  rate  is  the  amount  taken  from 
each  unit  of  the  base.  A  tax  rate  of  fifteen  mills  means 
that  for  every  unit  of  the  base  of  the  tax,  fifteen  mills  will 
be  taken.  Usually  when  the  rate  is  so  expressed,  the  unit 
of  the  base  is  one  dollar.  The  base  of  the  tax,  however, 
might  be  a  pound,  foot,  or  gallon.  A  number  of  taxes  are 
known  by  the  base  upon  which  the  computation  is  made, 
as  land,  poll,  income,  or  inheritance  taxes.  The  base  of 
a  tax  should  not  be  confused  with  its  source.  Money 
might  be  borrowed  to  pay  any  of  the  preceding  taxes. 
The  base,  then,  is  the  object  upon  which  the  computation 
is  made,  and  the  source  is  the  means  by  which  the  result 
of  the  computation  is  paid. 

As  already  indicated,  the  base  may  be  either  a  value 
measurement  or  some  other  characteristic.  When  taxes 
are  computed  upon  value  as  a  base  they  are  said  to  be 
ad  valorem.  When  some  other  unit  of  measure  is  used,  as 
pound,  yard,  or  gallon,  taxes  are  said  to  be  specific.  A 
10  per  cent  tax  on  the  value  of  wheat  sent  from  the  coun- 
try would  be  ad  valorem,  while  a  five-cent  tax  per  bushel 
would  be  specific.  Customs  duties  refer  to  taxes  placed 
upon  goods  entering  or  leaving  a  country,  while  excise 
taxes  or  internal  revenues  refer  to  taxes  placed  upon  goods 
produced  within  a  country.  Shifting  of  a  tax  signifies  the 
removal  of  the  burden  from  where  it  was  first  placed, 
while  the  incidence  refers  to  the  place  where  the  burden 
finally  rests.  Shifting  and  incidence  are  discussed  in  de- 
tail hi  a  following  chapter,  as  are  also  customs  duties  and 
excise  taxes. 

The  levy,  assessment,  and  tax  list  have  to  do  with  the 
machinery  of  taxation.  The  levy  of  a  tax  is  the  legal 
process  of  its  imposition.  Since  taxation  is  a  prerogative 
of  the  state,  the  levying  process  is  necessary  to  establish 


100  OUTLINES  OF  PUBLIC  FINANCE 

the  tax.  This  process  is  usually  retained  by  the  legislative 
department  with  no  power  of  delegating  it  to  anyone  else. 
The  assessment  consists  in  putting  the  tax  levy  into 
operation.  It  includes  all  the  steps  in  determining  the 
units  of  the  base,  and  what  the  holders  of  these  units  must 
pay.  The  tax  list  is  simply  a  record  of  this  assessment. 
It  may  be  used  by  various  governmental  units  that  have 
levied  taxes  upon  the  same  base,  or  for  various  legal  pur- 
poses, such  as  recording  ownership  and  transfer  of 
property. 

63.  The  Economic  Effect  of  Taxes  Has  Received  Much 
Consideration. — When  the  compulsory  payment  of  funds 
to  the  state  became  a  fixed  and  important  part  of  fiscal 
systems,  students  became  concerned  about  the  economic 
effects  of  such  procedure.  An  idea  commonly  held  among 
early  writers  was  that  a  tax,  to  some  degree  at  least, 
created  a  new  ability  on  the  part  of  the  person  who  paid 
it.  It  was  contended  that  the  fear  of  being  compelled  to 
change  one's  manner  of  living  because  of  the  burden  of 
the  tax,  would  cause  exertion  to  provide  for  the  tax  and 
still  leave  the  individual  as  well  situated  as  before.  Ex- 
amples of  the  increased  exertions  during  several  wars 
were  cited  to  prove  this  effect  of  taxes.  Some  pointed  out, 
however,  that  such  a  result  could  be  expected  only  if  the 
burden  was  not  so  great  as  to  seem  insurmountable. 
Others  took  the  view  that  there  was  no  power  in  a  tax  to 
create  ability  to  meet  it — that  people  did  not  get  ability 
to  spend  from  spending,  but  spent  because  they  had  the 
ability.  Energies  might  be  intensified  either  to  pay  the 
tax  or  to  devise  some  scheme  for  evading  it,  but  any  other 
reason  than  a  tax  might  have  caused  a  similar  intensifica- 
tion. Energy  itself,  moreover,  had  little  power  of  pro- 
duction, but  was  really  effective  only  when  applied  to 
capital.  A  tax  which  curtailed  the  amount  of  capital, 
therefore,  lessened  the  effectiveness  of  energy  and  cur- 
tailed the  ability  to  meet  the  burden. 

It  is  very  possible  that  a  tax  may  stimulate  production, 


TAXATION  1€1 

but  its  burden  is  felt,  none  the  less,  in  this  increased  use 
of  energy  which  is  designed  to  provide  the  tax.  If  taxes 
encroach  upon  capital,  it  means  a  lessening  of  productive 
power,  and  with  this  a  lessening  of  ability  to  meet  burdens. 
The  real  economic  consequences,  however,  cannot  be  de- 
termined without  knowing  what  would  have  been  done 
with  the  fund  had  the  state  not  taken  it,  and  then  what 
use  the  state  makes  of  it.  If  the  source  of  the  tax  is  one 
which  otherwise  would  have  been  squandered,  perhaps,  in 
a  way  to  lessen  the  efficiency  of  production,  then  it  is 
more  economical  for  the  state  to  take  it  and  use  it.  State 
expenditure,  moreover,  may  often  increase  productive 
efficiency,  and  hence  increase  the  ability  of  bearing  tax 
burdens.  Expenditures  for  maintaining  a  sound  system 
of  banking  and  currency,  standardizing  weights  and  meas- 
ures, and  providing  experiment  stations,  are  no  doubt  ex- 
penditures of  this  nature. 

Many  early  writers  opposed  taxes  which  would  affect 
capital.  Ricardo  favored  an  income  tax,¥  though  Mill 
pointed  out  that  a  tax  on  incomes  might  affect  capital  by 
impairing  savings.  All  were  agreed  that  capital  should 
not  be  impaired  by  taxation.  Whether  any  tax  will  im- 
pair capital  will  depend,  after  all,  on  the  habits  and  in- 
clination of  the  individual.  Two  men  may  each  have  an 
income  of  $2,000,  out  of  which  each  has  been  saving  $500. 
A  tax  of  $100  is  placed  upon  the  income  of  each.  One  now 
spends  only  $1,400,  and  still  adds  the  $500  to  his  capital 
account,  in  which  case  the  tax  has  had  no  effect  on  the 
accumulation  of  his  savings.  The  other  still  spends  $1,500, 
and  adds  only  $400  to  his  savings  account,  in  which  case 
the  tax  has  curtailed  savings.  It  can  be  readily  seen, 
therefore,  that  no  categorical  statement  can  be  made  as 
to  the  economic  effects  of  a  tax. 

64.  Adam  Smith  Gave  Four  Maxims  in  Regard  to  Taxes. 
— Adam  Smith  devotes  considerable  space  in  his  Wealth 
of  Nations1  to  a  treatment  of  taxation.  His  four  maxims, 

1  Wealth  of  Nations,  bk.  v,  chap.  ii. 


102  OUTLINES'  OF  PUBLIC  FINANCE 

or  canons,  as  they  are  commonly  called,  have  become 
more  famous,  perhaps,  than  any  other  passage  in  fiscal 
literature.  Since  they  are  just  as  applicable  to-day  as 
they  were  a  century  and  a  half  ago,  space  cannot  be  used 
to  better  advantage  than  in  quoting  these  canons  some- 
what at  length. 

(1)  The  subjects  of  every  state  ought  to  contribute  toward  the  sup- 
port of  the  government,  as  nearly  as  possible  in  proportion  to  their 
respective  abilities;   that  is,  in  proportion  to  the  revenue  which  they 
respectively  enjoy  under  the  protection  of  the  state.    The  expense  of 
government  to  the  individuals  of  a  great  nation  is  like  the  expense  of 
management  to  the  joint  tenants  of  a  great  estate,  who  are  all  obliged 
to  contribute  in  proportion  to  their  respective  interests  in  the  estate. 
In  the  observation  or  neglect  of  this  maxim  consists  what  is  tha£ojjality 
or  inequality  of  taxation. 

(2)  The  tax  which  each  individual  is  bound  to  pay  ought  to  be 
certain  and  not  arbitrary.    The  time  of  payment,  the  manner  of  pay- 
ment, the  quantity  to  be  paid,  ought  all  to  be  clear  and  plain  to  the 
contributor,  and  to  every  other  person.    Where  it  is  otherwise  every 
person  subject  to  the  tax  is  put  more  or  less  in  the  power  of  the  tax 
gatherer,  who  can  either  aggravate  the  tax  upon  any  obnoxious  con- 
tributor, or  extort,  by  the  terror  of  such  aggravation,  some  present  or 
perquisite  to  himself.    The  uncertainty  of  taxation  encourages  the  in- 
solence and  favors  the  corruption  of  an  order  of  men  who  are  naturally 
unpopular,  even  where  they  are  neither  insolent  nor  corrupt.     The 
jgrj/fJnf.y  of  what  each  individual  ought  to  pay  is,  in  taxation,  a  matter 
of  so  great  importance,  that  a  very  considerable  degree  of  inequality, 
it  appears,  I  believe,  from  the  experience  of  all  nations,  is  not  nearly 
so  great  an  evil  as  a  very  small  degree  of  uncertainty. 

(3)  Every  tax  ought  to  be  levied  at  the  time,  or  in  the  manner  in 
which  it  is  most  likely  to  be  convenient  for  the  contributor  to  pay  it. 
A  tax  upon  the  rent  of  land  or  of  houses,  payable  at  the  same  time  at 
which  such  rents  are  usually  paid,  is  levied  at  the  time  when  it  is  most 
likely  to  be  convenient  for  the  contributor  to  pay,  or  when  he  is  most 
likely  to  have  wherewithal  to  pay.     Taxes  upon  such  consumable 
goods  as  are  articles  of  luxury  are  all  finally  paid  by  the  consumer, 
and  generally  in  a  manner  that  is  very  convenient  for  him.    He  pays 
them  by  little  and  little  as  he  has  occasion  to  buy  the  goods.    As  he  is 
at  liberty,  too,  either  to  buy  or  not  to  buy,  as  he  pleases,  it  must  be  his 
own  fault  if  he  ever  suffers  any  considerable  inconvenience  from  such 
taxes. 

(4)  Every  tax  ought  to  be  so  contrived  as  both  to  take  out  and  to 


TAXATION  103 

keep  out  of  the  pockets  of  the  people  as  little  as  possible  over  and 
above  what  it  brings  into  the  public  treasury  of  the  state.  A  tax  may 
either  take  out  or  keep  out  of  the  pockets  of  the  people  a  great  deal 
more  than  it  brings  into  the  public  treasury,  in  the  four  following 
ways:  First,  the  levying  of  it  may  require  a  great  number  of  officers, 
whose  salaries  may  eat  up  the  greater  part  of  the  produce  of  the  tax, 
and  whose  prerequisites  may  impose  another  additional  tax  upon  the 
people.  Secondly,  it  may  obstruct  the  industry  of  the  people,  and  dis- 
courage them  from  applying  to  certain  branches  of  business  which 
might  give  maintenance  and  employment  to  great  multitudes.  While 
it  obliges  the  people  to  pay,  it  may  thus  diminish,  or  perhaps  destroy, 
some  of  the  funds  which  might  enable  them  more  easily  to  do  so. 
Thirdly,  by  the  forfeitures  and  other  penalties  which  those  unfortunate 
individuals  incur  who  attempt  unsuccessfully  to  evade  the  tax,  it  may 
frequently  ruin  them  and  thereby  put  an  end  to  the  benefit  which  the 
community  might  have  received  from  the  employment  of  their  capi- 
tals. .  .  .  Fourthly,  by  subjecting  the  people  to  the  frequent  visits  and 
the  odious  examination  of  the  tax  gatherers,  it  may  expose  them  to 
much  unnecessary  trouble,  vexation,  and  oppression;  and  though 
vexation  is  not,  strictly  speaking,  expense,  it  is  certainly  equivalent  to 
the  expense  at  which  every  man  would  be  willing  to  redeem  himself 
from  it.  It  is  in  some  one  or  other  of  these  four  different  ways  that 
taxes  are  frequently  so  much  more  burdensome  to  the  people  than  they 
are  beneficial  to  the  sovereign. 

65.  Many  Attempts  Have  Been  Made  to  Classify  Taxes. 
-The  different  tax  classifications  are  almost  as  numerous 
as  the  individuals  who  have  made  classifications.  The 
most  significant  failures  at  satisfactory  classification  have 
occurred,  perhaps,  where  the  attempt  has  been  made  to 
follow  some  natural  lines.  A  little  consideration  will 
indicate  the  futility  of  such  a  basis  of  classification.  Taxes 
are  used  for  various  purposes  in  different  countries,  while 
the  same  tax  may  be  used  for  different  purposes  in  the 
same  country.  The  idea  of  a  just  measure  for  taxes  varies 
widely,  and  different  bases  have  always  been  used  to 
attempt  to  arrive  at  that  justice  which  an  adopted  theory 
might  suggest.  With  such  a  diversity  of  fundamentals  it 
is  an  idle  waste  of  energy  to  attempt  to  place  taxes  into 
natural  categories. 

on  Shares  of  Social  Income. — Many  attempts  have 


104  OUTLINES  OF  PUBLIC  FINANCE 

been  made  to  base  taxes  upon  the  shares  into  which  the 
social  income  may  be  divided.  Adam  Smith  pointed  out 
that  "the  private  revenue  of  individuals  arises  ultimately 
from  three  different  sources — rent,  profit,  and  wages. 
Every  tax  must  finally  be  paid  from  some  one  or  other  of 
these  three  different  sorts  of  revenue,  or  from  all  of  them 
indifferently."  Others  have  followed  Smith  in  attempting 
to  use  this  classification.  If  the  present  social  income  is 
not  squandered,  so  that  modern  taxes  must  be  paid  out 
of  past  accumulations,  then  it  may  be  said  that  taxes  do 
properly  fall  upon  the  four  shares  of  distribution:  rent, 
interest,  wages,  or  profits.  As  a  workable  classification, 
however,  it  has  little  value.  A  tax  placed  upon  rent  may 
be  paid  out  of  interest.  The  four  shares  are  often  so 
combined,  moreover,  that  it  would  be  impossible  to  de- 
termine what  part  of  a  $500  tax  falls  upon  each  share  if 
it  were  placed  upon  the  recipient  of  all  of  the  four  shares. 
For  example,  who  could  determine  the  part  of  a  $500  tax, 
placed  upon  an  Iowa  farmer,  which  falls  upon  the  separate 
items  of  rent,  interest,  wages,  and  profits? 

Other  Bases  of  Classification. — Other  classifications  are 
taxes  upon  persons,  property,  and  income,  and  upon 
property  in  the  process  of  getting,  keeping,  or  spending. 
These  may  be  used  as  long  as  they  simply  indicate  the 
thing  against  which  the  tax  is  levied,  but  are  valueless  in 
indicating  the  source  from  which  payment  is  made. 
Taxes  upon  persons  might  be  levied  upon  the  individual 
as  such,  or  upon  members  of  a  particular  class,  designated 
by  some  particular  mark,  such  as  property,  age,  profes- 
sion, or  title.  A  general  poll  tax  would  be  an  example  of 
the  former,  while  a  poll  tax  on  males  over  twenty-one 
years  of  age,  or  upon  all  owners  of  land,  would  be  examples 
of  the  latter.  Where  the  tax  is  upon  property  or  income, 
these  are  considered  without  reference  to  the  individual. 
The  tax  is  against  the  property  or  income  rather  than 
against  the  person.  Taxes  classified  as  against  wealth  in 
the  process  of  getting  (income),  keeping  (property),  and 


TAXATION  105 

spending  (consumption)  simply  indicate  the  stage  in  this 
process  against  which  the  tax  is  levied.  Of  course  all  per- 
sonal taxes  must  be  paid  from  some  other  source  than 
that  against  which  the  levy  is  made,  while  a  tax  on  income 
might  possibly  be  paid  from  property,  and  one  on  property 
will  probably  be  paid  from  income. 

Direct  and  Indirect  Taxes. — One  early  classification, 
which  has  retained  its  importance  to  the  present,  is  that 
of  direct  and  indirect  taxes.  A  common  distinction  is 
that  the  burden  of  a  direct  tax  will  remain  where  the  tax 
is  levied,  while  the  burden  of  an  indirect  tax  will  be  shifted 
to  other  than  the  place  of  levy.  This  statement,  however, 
is  too  sweeping.  It  is  more  nearly  correct  to  say  that  such 
is  the  intention  or  expectation  of  the  authorities  who  levy 
the  tax.  A  tax  on  mortgages,  for  example,  is  a  direct  tax, 
for  it  is  expected  that  the  holder  will  consider  it  as  a  part 
of  his  property  and  pay  the  tax  assessed  against  it.  What 
often  happens,  however,  is  that  enough  higher  rate  of 
interest  is  charged  to  the  mortgagor  to  offset  the  tax  bur- 
den. In  this  case  the  burden  of  a  direct  tax  has  been 
shifted.  Taxes  on  monopolies,  on  the  other  hand,  are 
generally  believed  to  be  shifted  over  to  consumers  in  the 
form  of  higher  prices,  and  are  usually  considered  indirect. 
Modifying  factors  exist,  however,  which  may  cause  the 
monopoly  to  bear  the  tax  burden.1 

Direct  taxes  are  usually  much  more  definite  and  ascer- 
tainable  than  indirect.  This  is  because  they  are  based 
upon  a  more  definite  fact.  Authorities  may  be  sure  that 
land,  buildings,  incomes,  and  similar  bases  are  going  to 
continue  to  exist.  They  cannot  be  so  certain,  however,  as 
to  how  stable  the  demand  for  a  particular  commodity  is 
going  to  be,  or  how  it  will  be  affected  by  a  tax.  The  best 
examples  of  direct  taxes  are  poll,  land,  building,  income, 
property,  and  inheritance  taxes.  The  best  examples  of 
indirect  taxes  are  the  import  duties  and  excise  taxes,  as 
well  as  a  large  number  of  license  taxes.  A  few  exceptions 

1  For  a  discussion  of  the  effect  of  a  tax  on  monopolies,  see  p.  170. 


106  OUTLINES  OF  PUBLIC  FINANCE 

may  be  found  to  this  classification,  but  in  general  it  will 
hold.  The  Civil  War  income  tax,  for  example,  was  held 
by  the  Supreme  Court  to  be  an  indirect  tax,  although  the 
same  court  some  years  later  held  a  similar  tax  to  be  direct. 
Another  exception  is  that  the  French  government  does  not 
class  its  import  duties  as  indirect  taxes. 

Direct  and  indirect  taxes  do  not  hold  the  same  relative 
importance  under  different  forms  of  government,  or  in 
the  different  political  divisions  of  the  same  country.  In 
general,  direct  taxes  will  be  used  more  extensively  in 
countries  with  a  democratic  form  of  government,  while 
the  indirect  taxes  will  be  more  prominent  in  aristocracies. 
The  control  which  the  citizens  have  over  revenues  and 
expenditures  under  a  constitutional  government  makes 
them  more  willing  to  contribute  directly.  Where  the  citi- 
zen does  not  have  this  control,  or  where  the  expenditure 
is  likely  to  be  made  in  opposition  to  public  desire,  resort 
must  be  had  to  the  indirect  method  in  order  to  conceal 
the  tax  burden.  The  more  remote  and  immaterial  the 
service  which  the  state  gives,  therefore,  the  more  difficult 
it  is  to  get  direct  payments.  This  accounts  for  the  almost 
exclusive  use  of  direct  taxes  by  local  political  units,  while 
the  Federal  government  uses  a  much  larger  proportion  of 
indirect  taxes. 

66.  Taxes  May  Be  Justified  but  Not  Measured  by  the 
Benefits  Conferred  by  the  State. — With  the  advance  of 
civilization  and  the  development  of  governments,  the 
functions  of  the  state  increased.  To  carry  on  these  new 
activities,  added  sources  of  revenue  had  to  be  sought,  not 
only  to  meet  the  increased  expense,  but  also  to  make  up 
deficits  which  had  been  incurred  by  giving  up  some  of  the 
former  sources  of  revenue.  The  citizen,  naturally,  de- 
manded a  reason  for  the  increasing  taxes,  and  the  repre- 
sentatives of  the  state  were  obligated  to  furnish  them,  if 
the  needed  funds  were  to  continue  to  be  peacefully  secured. 
One  reason  sometimes  given  was  that  the  citizen  should 
make  a  money  payment  to  the  state,  since  the  state  no 


TAXATION  107 

longer  required  services  and  commodities,  as  in  an  earlier 
regime.  This  was  the  idea  of  commutation.  The  more 
general  justification  of  taxes,  however,  was  that  the  citizen 
was  the  recipient  of  benefits  from  the  expenditure  of  the 
funds.  When  this  conclusion  had  been  reached,  the  at- 
tempt was  made  to  go  farther  and  measure  what  each 
individual  should  pay  by  the  amount  of  benefit  he  re- 
ceived. This  is  known  as  the  benefit  theory  of  taxation — 
that  individuals  should  contribute  to  the  state  in  propor- 
tion as  they  are  benefited  by  it.  It  was  pointed  out  that 
larger  exactions  could  justly  be  made  from  the  wealthier 
classes  because  the  state  was  giving  them  more  benefit 
through  protecting  a  larger  amount  of  property. 

Difficulties  with  Benefit  Theory. — Difficulties  at  once  ap- 
pear in  attempting  to  use  benefit  as  a  measure  of  the 
amount  of  taxes  to  be  paid.  The  state  gives  a  number  of 
common  benefits  to  all,  such  as  the  guarantee  of  life, 
liberty,  and  the  pursuit  of  happiness.  Just  what  the 
benefit  of  this  immaterial  service  is  worth  it  is  of  course 
impossible  to  measure.  No  individual  can  say  just  what 
good  the  standing  army,  or  the  navy,  or  the  city  police 
force  is  to  him.  No  estimate  could  be  formed  until  the 
service  was  removed  and  the  situation  then  compared 
with  the  previous  one.  Not  all  services  are  of  this  in- 
tangible nature.  In  some  cases  a  rather  definite  estimate 
can  be  formed  of  the  value  received  from  the  public  ex- 
penditures. It  is  often  true,  however,  that  those  who 
receive  the  most  direct  benefits  are  able  to  pay  the  least 
in  return.  If  revenues  were  to  be  exacted  according  to 
services  rendered,  a  substantial  amount  would  come  from 
such  public  institutions  as  asylums,  poor  farms,  etc.  The 
inmates  of  these  receive  their  all  from  the  state — clothing, 
food,  shelter,  protection,  and  medical  services.  In  return 
they  are  unable  to  give  anything  for  this  consideration  in 
their  behalf. 

The  benefit  received  from  the  state  may  explain  to  a 
rich  bachelor  why  he  is  expected  to  contribute,  but  it  does 


108  OUTLINES  OF  PUBLIC  FINANCE 

not  convince  him  that  it  is  just  for  him  to  contribute  more 
into  a  fund,  a  large  part  of  which  is  used  for  education, 
than  does  a  man  whose  children  are  availing  themselves 
of  this  utility.  Likewise  many  other  examples  can  be 
called  to  mind  of  where  the  payment  required  is  so  out  of 
proportion  to  the  direct  benefit  received  that  it  is  evident 
that  some  other  criterion  must  be  found  for  the  measure 
of  taxes. 

Attitude  of  Courts. — In  spite  of  the  difficulties  with  this 
measure  of  taxation,  the  courts  have  continued  to  give  it 
an  important  place  in  their  decisions  as  to  justice.  The 
line  of  reasoning  is  that  there  is  a  relation  between  the 
amount  of  property  held,  or  the  amount  of  income  re- 
ceived, and  the  protection  given  by  the  state.  The  recog- 
nition is  made,  however,  that  other  benefits  exist  which 
cannot  be  measured,  and  that  a  tax  based  upon  the 
benefit  received  from  the  protection  of  property  or  income 
is  only  an  approximation  of  justice. 

67.  Faculty  Is  Usually  a  Satisfactory  Measure  for  Taxes. 
—The  difficulties  encountered  in  attempting  to  use  the 
benefit  theory  soon  led  to  numerous  other  proposals.  Some 
were  simply  modifications  of  this  theory,  while  others 
sought  justice  in  entirely  different  lines.  The  theory 
which  came  to  be  generally  accepted  as  the  one  which 
would  most  nearly  approximate  justice  is  called  the  fac- 
ulty or  ability  to  pay  theory — that  is,  every  individual 
should  pay  to  the  support  of  the  state  according  to  his 
ability. 

Adam  Smith  stated  the  theory  in  his  first  canon  of  taxa- 
tion, yet  connected  it  with  the  idea  that  benefits  measured 
ability.  Mill  approached  it  from  the  idea  of  equality  of 
sacrifice.  Equality  should  be  the  rule  in  taxation,  since 
it  should  be  the  rule  in  all  affairs  of  government.  The 
state  made  no  distinction  in  the  strength  of  individual 
claims  upon  it,  consequently  its  requirements  should  fall 
with  the  same  weight  upon  all.  In  this  way  the  least 
sacrifice  would  be  felt  by  the  whole.  His  criterion  of 


TAXATION  109 

equality  was  that  taxes  should  be  so  apportioned  that  in 
the  contribution  of  each  person  no  one  would  feel  more  or 
less  inconvenience  than  any  other  person.  He  realized 
that  this  standard  of  perfection  could  not  be  completely 
realized,  but  that  the  first  object  should  be  to  know  what 
perfection  is.1 

In  this  discussion  Mill  embodies  the  real  justification  of 
ability  to  pay  as  the  basis  for  justice  in  measuring  taxes. 
It  is  in  the  nature  of  the  state  itself.  It  is  an  existing 
entity  only  because  of  the  citizens  which  make  it  up.  If 
these  are  destroyed  the  state  no  longer  exists.  It  is  an 
organization,  then,  of  very  much  the  same  nature  as  other 
organizations  made  up  of  the  membership  of  individuals, 
and  whose  perpetuation  depends  upon  the  interest  of  the 
members.  If  the  membership  of  a  church,  lodge,  or  college 
fraternity  is  destroyed  or  becomes  disinterested,  the  or- 
ganization expires.  The  state  is  of  much  the  same  nature, 
and  its  continued  existence  is,  or  should  be,  of  such  vital 
interest  to  each  member  that  its  funds  can  justly  be 
secured  on  the  same  basis  as  in  a  church,  or  other  similar 
organization.  Here  the  members  are  not  expected  to  con- 
tribute in  respect  to  the  benefit  received,  which  may  be 
immeasurable,  but  in  accordance  with  their  ability.  Like- 
wise, in  raising  a  building  fund,  a  fraternity  expects  an 
alumni  member  who  has  the  ability  to  contribute  liber- 
ally, while  a  small  amount  or  nothing  is  expected  of  a 
student  member  with  little  means.  It  is  because  of  the 
nature  of  the  relation  of  the  citizen  to  the  state  that  taxes 
should  be  levied  in  accordance  with  the  ability  to  bear 
them. 

68.  Many  Problems  Arise  in  Measuring  Ability. — The 
decision  that  taxes  should  be  measured  by  ability  to  pay 
by  no  means  gives  a  solution  to  all  tax  problems.  One  of 
the  most  puzzling  questions  is  how  ability  can  best  be 
measured.  In  early  stages  of  development  this  was  com- 
paratively easy.  There  was  little  difference  in  the  owner- 

1  Mill,  Principles  of  Political  Economy,  bk.  v,  chap,  ii,  sec.  2. 


110  OUTLINES  OF  PUBLIC  FINANCE 

ship  of  property,  and  a  poll  tax  was  equitable.  As  soon  as 
differences  in  property  developed,  however,  the  idea  of 
equal  obligation  vanished  and  poll  taxes  now  have  only 
a  small  place  in  fiscal  systems.  The  first  property  distinc- 
tions were  between  those  who  owned  some  land,  cattle, 
slaves,  etc.,  and  those  who  owned  more  of  these  same 
commodities.  As  industry  developed  differences  in  capi- 
tal, wages,  and  incomes  had  to  be  considered  in  arriving 
at  the  ability  to  pay.  Personal  property,  both  tangible 
and  intangible,  must  now  be  considered,  as  well  as  the 
earlier  forms  of  wealth.  In  assessing  the  product  of  land 
or  industry,  choice  must  be  made  between  gross  product 
and  net  product.  Taxes  which  can  be  shifted  must  be 
weighed  against  those  which  cannot  when  the  determina- 
tion of  a  proper  base  for  taxes  is  under  consideration. 

Proportional  Taxes. — Land,  income,  property,  imports, 
or  domestically  produced  goods  might  be  considered  as  a 
just  base  for  measuring  the  ability  to  pay  taxes.  With 
this  decided,  however,  the  method  of  assessment  becomes 
important.  Some  have  contended  that  more  justice  is 
secured  when  the  same  proportion  is  taken  from  each 
base,  no  matter  what  the  size.  This  is  known  as  propor- 
tional taxation — the  rate  remains  the  same,  no  matter 
how  large  the  base.  If  2  per  cent  is  taken  from  a  base  of 
100  and  1,000,  the  result  is  that  proportional  amounts 
have  been  taken— 2r  the  amount  taken  from  the  100, 
is  to  100  as  20,  the  amount  taken  from  the  1,000,  is 
to  1,000.  The  advocates  for  this  method  claim  that  its 
justice  lies  in  its  definiteness.  It  is  sometimes  admitted 
that  proportional  amounts  do  not  always  mean  equal  sac- 
rifices, but  it  is  contended  that  greater  injustice  will  result 
if  proportion  is  abandoned.  As  an  early  writer  put  it, 
when  proportion  was  abandoned  you  were  at  sea  without 
rudder  or  compass,  and  there  was  no  amount  of  injustice 
or  folly  you  might  not  commit. 

Progressive  Taxes. — Many  authorities,  on  the  other 
hand,,  believe  that  justice,,  equality  of  sacrifice,  and  ability 


TAXATION  111 

to  pay  can  be  measured  more  accurately  by  using  pro- 
gressive rates — that  is,  to  have  the  rate  increase  as  the 
base  increases,  and  hence  take  a  greater  proportion  from 
a  large  base  than  from  lesser  ones.  This  system  is  known 
as  progressive  taxation.  Two  per  cent  from  a  base  of 
1,000,  4  per  cent  from  a  base  of  10,000,  and  6  per  cent 
-fronTa  base  of  100,000  would  represent  a  progressive 
scheme. 

The  first  justification  for  progression  is  that  it  more 
nearly  secures  equality  of  sacrifice  than  does  proportional 
taxation.  To  take  $100  from  a  base  of  $1,000  would 
entail  a  much  greater  sacrifice  than  to  take  $1,000  from 
a  base  of  $10,000.  In  the  one  case  only  $900  are  left, 
while  in  the  other  $9,000  are  left.  To  give  up  the  $100 
may  mean  an  encroachment  on  necessities — at  least  very 
much  more  of  an  encroachment  than  to  give  up  the 
$1,000.  A  second  important  justification  for  some  rate 
of  progression  as  best  measuring  ability  is  that,  as  wealth 
increases,  the  ease  of  producing  more  wealth  increases 
faster  than  at  a  proportionate  rate.  That  is,  the  diffi- 
culties that  must  be  overcome  in  producing  a  second 
$10,000  are  very  much  less  than  those  for  producing  the 
first  $10,000;  the  difficulties  in  obtaining  the  second  half 
of  the  $1,000,000  are  much  less  than  those  in  obtaining 
the  first  half.  As  wealth  or  incomes  increase,  therefore, 
the  owners  become  more  than  proportionately  able  to 
meet  tax  burdens. 

Degressive  Taxes. — One  important  objection  to  pro- 
gressive taxation  is  that  with  its  adoption  any  definite 
rule  is  abandoned,  while  the  only  logical  stopping  place 
is  100  per  cent,  or  confiscation.  When  this  is  reached  the 
source  of  the  tax  will  be  destroyed.  This  difficulty  is 
usually  alleviated  by  making  the  rate  degressive — that  is, 
to  have  the  rate  increase  as  the  base  increases,  but  by  an 
ever  decreasing  amount.  This  system  is  known  as  de- 
gressive taxation.  A  true  progressive  increase  would  be 
6,  8,  10,  etc.,  until  100  were  reached.  Degression 


112 


OUTLINES  OF  PUBLIC  FINANCE 


would  make  each  increase  less  than  the  preceding  one,  so 
that  the  rate  would  always  be  approaching  100,  or  some 
other  definite  amount  as  a  limit,  but  would  never  reach 
it.  A  mathematical  computation  of  these  rates  some- 
times might  prove  difficult,  so  the  desired  results  can  be 

GRAPH  No.  I 

SHOWING  THE  REAL  TAX  BURDEN  OF  A  10  PER  CENT  TAX  WITH  A  $1,000 
EXEMPTION 


7% 


1% 


1000  200Q^3ooo^'f<m.fo0o*booo  7000  8000  9000  10000 


approximated  by  allowing  a  fixed  exemption  on  each 
base,  and  levying  a  proportionate  rate  on  the  remainder. 
Suppose  an  exemption  of  $1,000  is  allowed  from  each  of 
the  bases  of  $2,000,  $4,000,  $6,000,  $8,000,  and  $10,000, 
and  a  10  per  cent  tax  were  levied  upon  the  remainder. 
The  actual  percentage  burden  upon  each  amount  would 


TAXATION 


113 


be  as  follows:  5  upon  $2,000;  7J5  upon  $4,000;  8.33  upon 
$6,000;  8.75  upon  $8,000;  and  9  upon  $10,000.  The 
accompanying  graph,  No.  I  (see  page  112),  will  show  the 
trend  of  a  curve  for  these  figures,  with  the  percentages  for 
the  intervening  thousands  also  shown. 

In  the  tax  scheme,  where  the  exemption  is  changed  as 
the  base  increases,  or  where  a  fixed  amount  is  taken  from 
each  grade  rather  than  a  certain  per  cent,  or  where  other 
than  proportionate  rates  are  used,  the  regularity  of  the 
curve  may  be  affected  in  a  number  of  ways.  As  long  as 

GRAPH  No.  II 
SHOWING  THE  REAL  PERCENTAGE  BURDEN  OF  THE  UNITED  STATES  INCOME  TAX 

The  figures  are  based  on  the  $3,000  exemption  for  unmarried  persons.  The  total  tax 
paid  by  each  grade  is  found  by  adding  the  additional  tax  for  each  grade  to  the  normal  tax 
of  2%.  These  rates  are  provided  under  the  1916  law,  and  do  not  include  the  supplemen- 
tary war  rates.  The  additional  rates  to  5150,000  are  as  follows: 

1%  from  $  20,000  to  $  40,000 

2%     "  40,000   "        60,000 

3%     "  60,000   "        80,000 

4%     "  80,000   "      100,000 

5%     "         100,000    "      150,000 


t% 


Go    $o      loo 
(.poo  omitted) 


/SO 


any  exemption  remains,  however,  it  is  impossible  to  reach 
100  per  cent,  or  confiscation.  Graph  No.  II  illustrates  the 
actual  percentage  burden  of  the  first  grades  under  the 


114 


OUTLINES  OF  PUBLIC  FINANCE 


1916  income  tax  in  the  United  States.  If,  instead  of 
a  percentage  tax  paid  in  each  grade,  a  lump  sum  is 
taken,  the  lines  within  each  grade  will  be  descending 
rather  than  ascending.  This  is  true  of  the  Prussian  in- 

GRAPH  No.  Ill 

SHOTTING  THE  REAL  PEBCENTAGE  BUHDEN  OP  A  LUMP-SUM  TAX  IN  AN  ASSUMED 

SCHEDULE 

The  grades  vary  by  a  $1,000  amount.  If  the  amovint  is  less  than  $1,000,  no  tax  is  col- 
lected; if  more  than  $1,000  and  less  than  $2,000,  $10  is  collected;  if  more  than  $2,000  and 
less  than  $3,000  the  tax  is  $30,  and  so  on  with  $00,  $100,  and  $200,  respectively,  levied  upon 
the  next  successive  grades. 


5% 


5% 
Z% 

3% 


I        SL       3        *       5       6 
(000  omitted) 

come  tax.    Graph  No.  Ill  illustrates  a  possible  curve  of 
this  nature. 

Regressive  Taxes. — It  is  possible  that  taxes  may  be 
levied  in  such  a  way  that  the  rate  may  be  regressive— 
that  is,  that  the  rate  decreases  as  the  base  increases.  In 
graph  No.  Ill  the  tax  within  each  of  the  grades  is  regres- 
sive. Such  taxes  would,  of  course,  seldom  be  levied  by 
design  for  purely  fiscal  purposes.  They  may,  however, 
be  used  as  regulatory  measures.  Certain  industries  whose 
products  are  considered  harmful  are  often  subject  to  a 
rate  of  taxation  much  higher  than  that  of  other  industries 
of  a  similar  degree  of  ability. 

Many  taxes,  however,  are  regressive  in  their  effects. 


TAXATION  115 

In  so  far  as  a  tax  on  tobacco  is  shifted  to  the  consumer, 
in  order  not  to  have  a  regressive  effect,  each  individual 
would  have  to  purchase  according  to  his  ability.  The 
effect  of  a  general  property  tax  is  much  the  same.  Owners 
of  a  small  amount  of  property  usually  have  it  in  a  tangible 
form,  which  is  easily  assessed,  while  the  owners  of  large 
amounts  hold  much  intangible  property,  which  escapes 
assessment  and  taxation.  This  places  a  burden  upon  the 
small  property  owner  out  of  proportion  to  his  ability  to 
bear  it.  Progressive  taxes  on  incomes  and  wealth,  then, 
may  tend  only  to  give  proportionality  to  the  tax  system 
as  a  whole,  since  they  to  some  extent  equalize  the  dispro- 
portionate burdens  caused  by  the  regressivity  of  other 
taxes. 

Either  proportional  or  progressive  taxes  may  be  par- 
tially regressive  if  the  rate  is  a  flat  amount  rather  than  a 
certain  per  cent.  A  ten  mill  rate  in  reality  means  that  the 
classes  are  to  be  differentiated  by  one  dollar  amounts. 
The  class  below  one  dollar  is  exempt;  from  one  dollar  to 
two  dollars  the  tax  is  ten  mills;  from  two  dollars  to  three 
dollars  it  is  twenty  mills,  etc.  In  this  case  the  tax  is  a 
greater  burden  upon  the  person  who  is  just  over  the  lower 
boundary  of  a  grade — say  $1.05 — than  one  who  is  near 
the  upper  limit — say  $1.95.  That  is,  ten  mills,  which 
each  will  pay,  is  a  larger  part  of  $1.05  than  of  $1.95.  The 
smaller  the  grades,  of  course,  the  less  the  effect  of  this 
regressivity  would  be  felt.  If  the  ten  mill  tax  be  calcu- 
lated as  a  1  per  cent  tax,  and  levied  upon  the  actual 
amount  of  the  base,  then  the  tax  is  proportional  rather 
than  regressive  within  each  grade. 

Apportioned  Taxes. — Taxes,  moreover,  are  sometimes 
said  to  be  apportioned.  This  occurs  when  some  central 
political  unit  distributes  the  amount  of  tax  to  be  collected 
among  several  of  the  minor  political  divisions  which  com- 
pose it.  The  apportionment  may  be  made  according  to 
some  definite  rule,  such  as  population,  property,  or  in- 
come, or  it  may  be  that  each  district  in  the  apportionment 


116  OUTLINES  OF  PUBLIC  FINANCE 

area  will  be  asked  to  contribute  an  equal  amount.  An 
apportionment  according  to  some  definite  rule,  however, 
does  not  prescribe  a  definite  plan  for  raising  the  tax.  A 
tax  apportioned  on  the  base  of  population,  for  example, 
does  not  mean  that  the  levy  will  be  in  the  form  of  a  poll 
tax.  Each  district  may  use  any  method  it  chooses  in 
raising  the  necessary  amount. 

Kinds  of  Incomes. — Another  problem  which  arises  con- 
cerns the  ability  of  a  base  to  bear  taxes  under  varying 
conditions.  Distinction  is  often  made  between  earned 
and  unearned  incomes  and  wealth,  and  between  the  funded 
and  unfunded  incomes  and  wealth.  It  seems  reasonable 
that  a  greater  sacrifice  would  be  felt  by  giving  up  an 
amount  from  funds  secured  through  labor  than  if  they 
had  been  secured  in  some  fortuitous  manner.  Likewise 
a  funded  income — one  which  is  dependent  upon  some 
other  factor  than  the  efforts  of  the  individual  receiving  it 
— can  better  bear  burdens  than  one  which  depends  solely 
upon  the  exertions  of  the  recipient.  The  former  will  con- 
tinue when  the  productive  capacity  of  the  individual 
ceases;  the  latter  will  not.  No  one  would  hesitate  in 
choosing  between  the  two  forms  of  income. 

In  seeking  to  determine  the  faculty  of  the  taxpayer, 
then,  a  number  of  complex  problems  must  be  considered. 
Not  only  must  a  just  base  be  found,  but  justice  must  be 
used  in  applying  the  rate  of  tax.  No  tax,  moreover,  can 
be  viewed  as  a  distinct  factor,  but  must  be  considered  in 
relation  to  the  other  taxes  in  the  system.  A  particular 
tax  might  be  found  to  work  injustice,  but  when  used  with 
another  the  two  may  be  found  to  work  together  in  such 
a  way  that  justice  will  result. 

69.  The  Social  Aspects  of  Taxes  Deserve  Considera- 
tion.— Many  reforms  have  been  advocated  with  taxation 
as  the  machinery  through  which  they  were  to  be  accom- 
plished. In  these  programs  of  reform  taxes  have  been 
considered  as  having  a  social  or  ethical  function  as  well 
as  a  fiscal  function.  Some  attempts  have  been  made  to 


TAXATION  117 

separate  taxes  into  periods,  in  one  of  which  they  were 
used  only  from  the  fiscal  standpoint;  in  the  other,  from 
social  considerations  as  well  as  fiscal.  It  would  be  difficult 
to  find  a  time,  however,  when  taxes  were  not  used  to  some 
extent  as  a  social  measure. 

Different  persons  suggest  different  social  functions  for 
taxes,  according  to  the  institutions  they  would  have  cor- 
rected. Some  of  the  more  extreme  would  have  the  state 
use  the  taxing  power  as  a  means  of  equalizing  wealth. 
This  use  of  taxes  is  sometimes  advocated  on  the  ground 
that  wealth  inequalities  have  arisen  because  of  the  past 
action  of  the  state,  and  hence  the  state  is  perfectly  justified 
in  taxing  large  wealth.  This  principle  is  sometimes  called 
the  compensatory  theory  of  taxation.  Others,  who  think 
the  present  system  of  wealth  distribution  woefully  un- 
sound, would  use  taxes,  not  only  to  break  down  large 
fortunes  now  in  existence,  but  to  remove  political  and 
economic  conditions  which  make  such  unequal  accumula- 
tions of  wealth  possible.  To  accept  such  a  field  as  a  proper 
function  for  taxes,  one  must  be  willing  to  concede  the 
present  scheme  of  distribution  to  be  unjust  and  to  be 
based  upon  unsound  principles — a  concession  which  would 
not  generally  be  made. 

Regulation  of  Undesirable  Institutions. — Taxation  has 
seldom  been  used  to  the  extent  suggested  in  the  preceding 
paragraph,  yet  everyone  is  familiar  with  its  use  for  elimi- 
nating or  regulating  social  evils.  The  circulation  of  state 
bank  notes  was  considered  such  an  evil  to  sound  currency 
that  their  continued  use  was  made  unprofitable  by  the 
heavy  tax  that  was  placed  upon  them.  Enterprises  whose 
products  are  considered  harmful  to  the  moral  or  physical 
well-being  of  society  are  frequently  subject  to  taxes. 
Conspicuous  among  these  are  the  taxes  which  have  been 
placed  upon  the  liquor  industry.  The  ethical  question 
arises,  however,  as  to  the  justice  of  compromising  with 
evil  by  allowing  it  to  remain  by  paying  a  tax.  To  eliminate 
an  evil  at  once,  however,  may  not  always  be  desirable, 


118  OUTLINES  OF  PUBLIC  FINANCE 

or  an  institution  may  be  an  evil  only  if  it  is  unregulated. 
Taxation  may  be  used  in  these  cases  as  a  valuable  social 
weapon. 

Since  taxes  have  so  often  been  used  with  a  social  sig- 
nificance, some  would  have  this  aspect  a  prune  considera- 
tion in  the  levy  of  every  tax.  The  purpose  of  the  state  is 
to  promote  the  general  welfare,  and  this  is  accomplished 
most  effectively  when  the  state  so  functions  as  to  bring 
the  greatest  good  to  the  greatest  number.  In  levying 
taxes,  then,  the  state  should  not  only  be  concerned  about 
the  sacrifice  upon  the  individual  who  must  pay,  but  with 
the  good  or  evil  effects  upon  society  as  a  whole.  If  the 
base  be  considered  an  evil,  then  a  repressive  tax  is  desir- 
able, and  the  resulting  good  to  society  would  more  than 
counteract  the  loss  to  the  industry,  even  though  it  be 
destroyed. 

With  this  idea  in  mind,  officials  should  carefully  con- 
sider the  bases  upon  which  taxes  will  be  levied.  Taxes 
tend  to  have  a  repressive  effect,  and  if  levied  upon  a  de- 
sirable and  useful  industry  to  such  an  extent  that  its 
production  is  noticeably  curtailed,  the  sacrifice  of  the  tax- 
payer may  be  small  in  comparison  to  the  general  burden 
on  society.  Authorities,  in  levying  taxes,  then,  should  be 
concerned  not  only  with  the  fiscal  aspects,  but  with  the 
possible  repressive  effects  as  well.  There  can  be  little 
doubt  that,  with  the  development  of  the  police  power,  the 
social  aspect  of  taxes  will  continue  to  receive  much 
consideration. 

70.  States  Do  Not  Always  Attempt  to  Follow  Principles 
of  Justice  in  Levying  Taxes. — It  must  not  be  forgotten 
that  the  primary  concern  of  the  state  is  to  get  revenue; 
hence  considerations  of  justice  often  give  way  to  those  of 
expediency.  Taxes  are  found  in  the  fiscal  system  which 
cannot  be  justified  on  the  basis  of  equality  of  sacrifice, 
and  which  must  be  considered  in  formulating  a  new 
scheme  simply  because  they  have  been  embedded  there 
by  age.  The  very  fact  that  they  have  been  able  to  erjclijre 


TAXATION  119 

is  enough  proof  that  they  are  good  taxes.  To  fiscal  stu- 
dents, the  saying  that  an  "old  tax  is  a  good  tax,"  is  almost 
trite.  The  ones  who  pay  have  become  accustomed  to  the 
burden  and  little  objection  is  made.  It  is  a  place  where 
the  goose  may  be  plucked  with  little  squawking. 

The  burden  of  indirect  taxes  is  much  greater  upon  the 
poorer  classes  than  upon  the  rich,  yet  there  is  no  evidence 
that  they  are  being  given  up  to  obtain  equality.  The 
qualities  of  expediency  are  too  evident  to  cast  them  lightly 
aside.  Revenue  is  easily  obtained  at  low  cost  and  with 
little  objection,  since  it  is  paid  in  the  purchase  price  of 
goods,  frequently  without  the  knowledge  of  its  being  paid. 
The  use  of  the  income  and  inheritance  tax  by  the  Federal 
government,  however,  is  evidence  that  less  reliance  will 
be  placed  upon  indirect  taxes  in  the  future  than  has  been 
placed  upon  them  in  the  past.  Fiscal  authorities  are  often 
concerned  in  arriving  at  a  workable  scheme — one  which 
will  produce  revenue  at  a  reasonable  cost,  and  which  will 
arouse  as  little  antagonism  as  possible.  In  formulating 
tax  programs  and  in  proposing  tax  reforms,  however, 
public  officials  have  given  much  attention  to  justice. 

ADDITIONAL  READING 

Seligman,  Progressive  Taxation  in  Theory  and  Practice. 


CHAPTER  VI 

FEES,   SPECIAL  ASSESSMENTS,   AND   OTHER  REVENUES 

71.  Several  Factors  May  Be  Considered  in  Classifying 
Revenues. — It  has  been  noted  that  taxes  are  the  compul- 
sory levies  which  are  made  without  special  reference  to 
the  assignment  of  individual  benefits.    It  is  conceivable, 
of  course,  that  other  sorts  of  payments  may  be  made. 
Some  may  be  made  with  no  compulsion,  while  with  some 
only  a  small  degree  of  compulsion  may  be  used.    There 
may  be  much  difference  in  the  kind  and  amount  of  public 
interest  in  the  benefit  which  the  state  gives.    Many  pay- 
ments, moreover,  give  a  very  direct  benefit  to  the  individ- 
uals making  the  contribution.    Several  of  these  elements 
may  be  involved  in  any  single  payment.    A  contribution 
may  not  be  compulsory,  yet  if  the  service  is  to  be  enjoyed 
by  the  individual  a  payment  must  be  made.     On  the 
other  hand,  an  individual  may  not  wish  to  pay,  yet,  be- 
cause of  particular  benefits  which  accrue  to  him  from  the 
action  of  the  state,  he  is  compelled  to  share  in  the  cost  of 
the  benefits.    Frequently,  also,  the  state  supplies  a  service 
which  the  individual  may  or  may  not  use,  as  he  chooses. 
Other  avenues  may  be  open  to  him  to  get  the  same  service. 
If  he  accepts  it  from  the  state,  however,  payment  must 
be  made.    The  forms  of  revenue  suggested  by  these  as- 
pects will  form  the  basis  of  most  of  the  discussion  of  this 
chapter.     The  three  important  forms  are  fees,  special 
assessments,  and  public  prices.     Other  minor  forms  of 
revenue  will  also  receive  brief  consideration. 

72.  Fees  Have  an  Important  Place  in  Revenue  Systems. 
— As  the  activities  of  the  state  expanded,  and  the  means 


FEES,  SPECIAL  ASSESSMENTS,  REVENUES     121 

by  which  it  had  been  self-supporting  were  either  given  up 
or  disappeared,  a  greater  amount  of  reliance  for  support 
continually  had  to  be  put  upon  the  individual.  In  order 
to  justify  this  in  the  mind  of  the  contributor,  the  attempt 
was  usually  made  to  show  some  special  benefit  which  he 
was  receiving  from  the  state  because  he  made  the  expendi- 
ture. While  much  of  the  revenue  of  the  modern  state  is 
in  the  nature  of  taxes,  yet  special  payments  for  special 
benefits  still  form  an  important  class.  One  outstanding 
example  is  the  fee. 

Definition  of  Fee. — In  some  respects  fees  are  similar  to 
taxes.  In  both  cases  the  levy  is  primarily  for  the  public 
good.  The  state  fixes  the  amount  of  the  fee,  as  well  as 
the  amount  of  a  tax.  A  tax  is  a  compulsory  levy,  while  the 
fee  is  largely  so.  The  outstanding  difference,  however,  is 
that,  while  the  payment  of  the  fee  does  aid  in  carrying  on 
a  state  function  for  the  common  good,  the  state  at  the 
same  tune  gives  some  special  benefit  to  the  individual 
who  makes  the  payment.  A  fee  might  be  defined,  then, 
as  a  semicompulsory  levy  for  some  benefit,  undertaken  pri- 
marily for  the  public  good,  which  also  confers  some  benefit 
on  the  individual  who  makes  the  payment. 

Examples  of  Fees. — Examples  of  fees  are  numerous. 
The  varied  use  of  court  fees  at  once  presents  itself  to  mind. 
Courts  are  maintained  for  the  purpose  of  establishing 
justice,  yet  the  individual  who  avails  himself  of  the  service 
receives  a  benefit  and  is  charged  a  fee.  The  recording  of 
deeds  and  mortgages,  and  the  issuing  of  marriage  licenses, 
are  undertaken  for  the  public  good,  yet  a  charge  is  made 
to  the  individual  who  records  a  deed  or  mortgage  or  who 
secures  a  license. 

Many  of  our  so-called  taxes  are  simply  fees.  Most 
license  taxes  are  of  this  nature.  The  members  of  various 
groups  of  labor  must  secure  licenses  to  follow  their  trade 
legally.  Such  are  taxicab  drivers,  teamsters,  engineers  of 
various  sorts,  and  peddlers.  The  state  has  recognized 
that  the  welfare  of  society  demands  some  regulation  of 


122  OUTLINES  OF  PUBLIC  FINANCE 

these  occupations.  It  has  been  found  that  the  individual 
under  regulation  has  been  willing  to  pay  for  the  privilege 
of  carrying  on  the  activity.  The  sale  of  liquor  is  an  exam- 
ple of  an  industry  which  was  extensively  regulated  by  the 
use  of  the  license  or  fee  payments.  In  such  cases  the  pro- 
prietor of  the  business  is  often  anxious  that  the  fee  be 
high,  so  that  his  marginal  competitors  be  driven  out  of 
business  and  leave  the  situation  more  nearly  a  monopoly. 
Under  such  a  condition  those  remaining  in  business  may 
more  than  recoup  themselves  for  the  fee  paid,  by  the  in- 
creased prices  and  trade.  It  is  to  the  social  interest  to 
keep  track  of  the  owners  of  motor  cars,  and  a  license  must 
be  secured  for  which  a  fee  is  charged  before  it  becomes 
legal  to  operate  a  car.  Dog  taxes  are  of  the  same  nature. 
A  profusion  of  worthless  dogs  is  recognized  as  a  nuisance, 
and  an  attempt  is  made  to  keep  down  numbers  by  levying 
a  tax  upon  every  dog. 

A  group  of  persons  may  wish  to  be  recognized  legally 
as  an  individual,  and  a  charter  is  granted  by  the  state 
which  makes  them  a  corporation.  For  this  service  a  fee 
is  charged  which  varies  in  the  different  states.  Numerous 
other  examples  of  fees  might  be  given,  and  many  others 
will  occur  to  the  reader.  The  ones  given,  however,  serve 
to  show  the  wide  extent  of  the  use  of  fees,  and  the  various 
purposes  which  they  serve. 

Fees  Semicompulsory. — These  examples  illustrate  the 
semicompulsory  nature  of  the  fee  payment.  It  can  be 
seen  that,  while  the  levy  is  determined  by  the  public 
authority,  it  is  only  paid  when  the  individual  avails  him- 
self of  the  benefit  with  which  the  fee  payment  is  con- 
nected. That  is,  if  the  individual  does  not  avail  himself 
of  the  benefit  no  payment  is  made,  but  the  payment  is 
compulsory  if  the  benefit  is  used.  When  the  state  enacts 
a  statute  that  every  driver  of  a  taxicab  must  secure  a 
license,  for  which  a  fee  will  be  charged,  it  does  not  thereby 
compel  any  individual  to  become  a  driver,  but  if  he  secure 
the  privilege  to  enter  this  form  of  obtaining  a  livelihood 


FEES,  SPECIAL  ASSESSMENTS,  REVENUES    123 

he  must  pay  the  fee.  Neither  does  the  law  compel  any 
individual  to  own  a  dog,  yet  if  anyone  desires  to  own  a 
dog  he  must  pay  for  the  privilege.  Again,  a  group  of  in- 
dividuals could  enter  business  under  the  partnership  form 
of  organization,  but  if  they  want  the  privilege  of  existing 
and  being  known  as  a  corporation,  they  must  pay  a  fee 
to  the  state  for  granting  the  privilege. 

The  degree  of  compulsion  varies  greatly,  then,  accord- 
ing to  the  desirability  or  necessity  of  the  service  which  is 
undertaken.  It  is  sometimes  said  that  in  this  sense  taxes 
are  not  compulsory.  For  example,  if  a  man  does  not  want 
to  pay  taxes  on  his  farm  he  may  sell  the  farm;  if  he  does 
not  want  to  pay  them  on  income  he  can  cease  getting  an 
income.  In  the  first  case,  the  tax  on  the  land  would  be 
paid  no  matter  how  many  sales  occurred,  and  in  the  second 
the  giving  up  of  an  income  is  highly  improbable.  The 
degree  of  compulsion  in  all  taxes  is  not  the  same,  neither 
is  it  for  fees.  It  may  be  true  that  some  fees  are  more 
compulsory  than  some  taxes,  yet  in  general  fees  represent 
a  less  compulsory  form  of  revenue. 

73.  The  Characteristics  of  Fees  Vary. — The  revenue  re- 
ceived from  the  payment  of  fees  does  not  always  occupy 
the  same  place  in  fiscal  systems.  It  may  be  set  aside  for 
some  specific  purpose,  or  simply  be  placed  in  the  common 
fund  to  help  meet  general  expenditures.  The  dog  tax,  for 
example,  is  commonly  set  aside  to  pay  damages  to  sheep 
owners  for  the  destruction  wrought  to  their  flocks  by 
dogs.  Some  states  use  all  funds  secured  from  licensing 
automobiles  for  building  or  improving  highways.  A  com- 
mon earlier  use  of  the  fee  was  to  remunerate  the  incum- 
bent of  the  office  through  which  the  fee  was  secured.  This 
system  proved  to  be  very  unjust,  because  there  was  fre- 
quently no  relation  between  the  amount  of  labor  of  the 
various  officials  and  the  remuneration  which  came  to 
them.  As  population  increased,  moreover,  the  amount  of 
services  to  be  paid  for  in  this  way  expanded  to  such  an 
extent  that  the  resulting  remuneration  became  unreason- 


124  OUTLINES  OF  PUBLIC  FINANCE 

ably  large.  The  recent  tendency  has  been  to  put  the  re- 
turns from  fees  into  the  general  treasury  and  pay  the 
official  a  fixed  salary.  In  this  way  an  adequate  compensa- 
tion for  services  rendered  is  much  more  nearly  accom- 
plished. 

No  general  statement  can  be  made  as  to  the  relation 
between  the  amount  of  the  fee  and  the  cost  of  rendering 
the  service.  Some  have  contended  that  any  payment 
which  exceeds  the  cost  of  rendering  the  service  automati- 
cally loses  the  nature  of  a  fee  and  becomes  a  tax.  This 
would  perhaps  be  true  of  services  of  a  more  or  less  com- 
mercial nature.  When,  for  example,  such  charges  are 
made  for  the  use  of  a  postal  system  that  no  net  revenue, 
or  perhaps  a  deficit  accrues  to  the  government,  the  charge 
is  evidently  a  fee.  The  primary  purpose  in  view  is  social 
progress — education,  enlightenment,  ease  of  communica- 
tion, and  similar  considerations.  These  are  the  justifica- 
tions for  undertaking  the  service.  If,  however,  the  rates 
have  been  so  fixed  as  to  lessen  the  amount  of  service  in 
order  to  obtain  a  large  net  return — that  is,  the  idea  in 
undertaking  the  sendee  has  been  to  get  revenue — then 
the  charge  loses  the  nature  of  a  fee  and  partakes  more  of 
that  of  a  tax  or  public  price. 

The  United  States  postal  services,  as  well  as  the  con- 
duct of  many  municipal  water  plants,  furnish  examples 
of  commercial  enterprises  which  have  adhered  to  the  fee 
basis  of  charge.  The  French  tobacco  monopoly  is  an 
example  of  such  an  enterprise  in  which  the  purpose  of 
securing  revenue  predominates.  On  the  other  hand, 
many  fees  exceed  the  cost  of  providing  the  service,  or 
there  is  no  attempt  made  to  compare  the  cost  with  the 
exaction  which  is  made.  Most  of  the  court  fees  are  exam- 
ples of  this  kind.  Such  services  often  require  simply  the 
filling  out  of  blank  forms,  for  which  a  nominal  fee  is 
charged.  The  chartering  of  a  corporation,  and  the  grant- 
ing of  various  kinds  of  permits,  are  other  examples  of  this 
type.  The  service  is  undertaken  primarily  for  the  common 


FEES,  SPECIAL  ASSESSMENTS,  REVENUES    125 

good,  the  idea  of  revenue  is  secondary,  and  the  arbitrary 
fee  which  is  exacted  is  paid  because  the  individual  receives 
a  direct  benefit. 

Fees  and  the  Police  Power. — An  increase  in  the  use  of 
fees  has  accompanied  the  extended  use  of  the  police  power. 
This  power  is  that  sovereign  right  of  the  commonwealth 
to  protect  the  economic,  physical,  and  moral  welfare  of 
its  citizens.  As  former  individual  liberties  become  more 
and  more  restricted  for  the  good  of  the  group,  the  system 
of  granting  licenses  becomes  more  prevalent.  The  size 
of  the  fee  is  often  governed  by  the  amount  of  repression 
which  is  desired.  If  the  regulation  have  in  view  simply 
to  test  efficiency,  or  have  on  record  the  members  of  a 
particular  trade,  the  fee  will  likely  be  comparatively  low. 
The  granting  of  licenses  to  teachers,  engineers,  teamsters, 
and  the  like  would  likely  be  of  this  nature.  When  the 
institution  upon  which  the  fee  is  levied  is  harmful,  and 
intended  to  be  repressed,  the  fee  may  be  large.  The  fees 
that  have  been  paid  by  liquor  establishments,  dance  halls, 
and  poolrooms  indicate  this  tendency. 

74.  Fees  Have  Held  an  Important  Place  in  the  Fiscal 
Systems  of  European  Countries. — The  importance  of  the 
use  of  fees  immediately  following  the  feudal  regime  has 
been  indicated.  It  must  not  be  inferred,  however,  that 
this  was  the  first  tune  they  formed  a  part  of  fiscal  systems. 
Early  Greece  and  Rome  furnish  numerous  examples  of 
fee  payments,  the  nature  of  which  is  remarkably  modern. 
Various  classes  of  court  fees  were  used  in  both  countries. 
Fees  for  the  use  of  publicly  maintained  utilities,  such  as 
harbors,  streets,  and  roads,  were  extensively  used.  Fees 
were  frequently  used  in  connection  with  religious  priv- 
ileges. The  amount  of  revenue  which  could  be  secured 
was  often  the  factor  which  determined  the  size  of  the  fee. 

Fees  in  England. — The  modern  fees  in  England  are  used 
for  the  purpose  of  regulation  and  for  securing  revenues. 
Practically  from  the  beginning  both  of  these  motives  have 
been  present.  The  revenue  aspect  is  seen  in  the  fees 


126  OUTLINES  OF  PUBLIC  FINANCE 

which  were  charged  for  granting  monopolies,  or  for  the 
licenses  to  hunt  and  fish  upon  the  public  domain.  The 
numerous  fees  which  were  used  to  regulate  the  crafts  and 
guilds  illustrate  the  other  type.  When  institutions  arose 
which  called  for  state  regulation,  the  regulation  was  at 
first  undertaken  without  charge.  Fees  were  soon  invoked, 
however,  for  the  granting  of  licenses,  and  the  tendency 
has  been  to  make  them  heavier.  The  best  example  of 
this  type  is  the  fee  for  granting  liquor  licenses.  Important 
sources  of  revenue  are  the  fees  from  harbors,  bridges, 
roads,  lighthouses,  and  markets.  The  court  fees  are  also 
numerous  and  lucrative.  The  whole  tendency  has  been 
to  fix  the  fee  at  the  place  where  the  highest  revenue  would 
be  secured. 

Fees  in  France. — France  has  used  fees,  perhaps,  even 
more  extensively.  The  primaiy  motive  has  usually  been 
revenue,  although  there  are  some  examples  of  where  the 
fee  charged  is  less  than  the  cost  of  the  service.  The 
amount  of  many  fees  has  been  raised  and  lowered  until 
the  point  which  will  yield  the  highest  net  return  has  been 
found,  and  here  it  remains.  The  use  of  fees  has  been  a 
remarkably  successful  part  of  the  fiscal  system,  owing 
largely  to  the  highly  efficient  administrative  machinery. 
Examples  of  the  more  important  fees  which  are  used  in 
France  are  those  for  the  use  of  public  utilities  and  educa- 
tional institutions,  for  the  granting  of  patents  and  hunting 
and  liquor  licenses,  for  permission  to  erect  signs  on  public 
property,  for  registering  legal  papers,  and  the  postal  fees. 

75.  Fees  Have  Been  Used  Extensively  in  the  United 
States. — The  American  colonies,  as  might  be  expected 
from  the  practices  of  the  Mother  country,  made  a  wide 
use  of  fees.  Most  of  the  Colonial  officials  were  remuner- 
ated for  their  services  by  the  fees  which  they  collected. 
The  use  of  money  was  developed  to  only  a  limited  extent, 
consequently  most  payments  were  made  in  products. 
Much  fraud  was  practiced  by  the  officials  in  order  to  in- 
crease the  payments,  Simple  transactions  werQ  often 


FEES,  SPECIAL  ASSESSMENTS,  REVENUES    127 

divided  into  a  number  of  parts,  and  a  fee  was  charged  for 
each  part.  Few  fees  for  granting  licenses  were  found, 
since  comparatively  little  regulation  was  needed.  It  would 
have  been  surprising,  since  fees  played  such  an  important 
place  in  the  colonies,  had  they  not  been  used  extensively 
by  the  Federal  and  state  governments  when  they  were 
formed.  From  the  beginning  fees  have  held  an  important 
place  for  various  purposes  in  these  governmental  units. 

One  of  the  first  instances  of  the  use  of  fees  by  the  Fed- 
eral government  was  in  connection  with  the  granting  of 
patents.  The  salaries  of  the  Patent  Office  officials  were  to 
consist  of  the  fees  collected.  They  were  so  small,  however, 
and  the  number  of  patents  secured  in  the  early  years  were 
so  few,  that  it  became  necessary  to  increase  the  fees. 
Later  the  fees  were  paid  directly  into  the  treasury,  and  the 
officials  were  placed  on  a  fixed  salary  basis.  Practically 
the  same  has  been  true  of  the  copyright  fees. 

All  sorts  of  fees  have  been  used  in  connection  with  ship- 
ping, such  as  for  handling  imports,  and  for  licensing  ves- 
sels, and  the  numerous  maritime  officials.  At  first  these 
fees  constituted  the  remuneration  of  the  officials,  but 
changes  were  gradually  made  to  a  salary  basis.  The  same 
has  been  true  of  the  fees  connected  with  the  consular  and 
diplomatic  service  and  courts.  A  large  part  of  the  fees 
of  the  states  and  local  governmental  units  are  for  the 
granting  of  some  privilege,  or  for  performing  some  in- 
spection. A  large  number  of  court  fees  are  also  found. 
In  most  cases  the  payment  goes  into  the  treasury  and  the 
official  is  paid  a  fixed  salary. 

Payment  by  Salary. — One  tendency  stands  out  promi- 
nently in  this  development  of  the  use  of  fees — to  give 
them  up  as  a  basis  of  payment  to  officials.  In  a  progressive 
and  changing  country  it  is  impossible  to  frame  a  schedule 
which  will  work  justice  to  all  officials.  Economic  condi- 
tions may  change  quickly,  so  that  the  operations  requiring 
a  fee  payment  may  increase  many  fold  in  a  few  months 
or  may  totally  disappear..  The  payment  of  officials  by 


128  OUTLINES  OF  PUBLIC  FINANCE 

fees,  who  were  disposing  of  the  public  lands,  illustrates 
the  difficulty.  Some  did  "  a  land  office  business  "  and  were 
more  than  satisfied,  while  others  received  so  little  as  to 
make  it  unprofitable  to  maintain  the  office.  These  diffi- 
culties, together  with  the  temptation  to  fraudulent  acts 
to  create  more  fees,  has  been  responsible  for  the  wide 
adoption  of  the  fixed  salary  as  a  basis  of  payment.  Nu- 
merous examples  may  be  found,  however,  especially  in 
the  local  political  units,  where  the  fee  is  retained  by  the 
official  as  a  part  or  all  of  his  salary. 

76.  Fees  Have  Important  Social  and  Political  Aspects. 
—The  importance  of  the  indirect  social  and  political 
effects  of  the  fee  system  must  not  be  overlooked.  It  is 
especially  marked  where  the  salary  of  the  official  is  the 
fees  collected.  Under  such  conditions  systems  of  regula- 
tion are  likely  to  defeat  their  own  ends.  For  example,  it 
has  long  been  the  custom  to  require  persons  contemplating 
marriage  to  secure  a  license.  To  do  this  the  requirements 
of  the  state  are  expected  to  be  fulfilled,  and  it  is  the  busi- 
ness of  the  official  to  see  that  such  is  the  case.  If,  however, 
the  fee  for  granting  the  license  is  to  go  to  the  official,  age, 
relationship,  or  whatever  the  requirement  may  be,  might 
be  easily  set  aside  in  order  to  get  the  fee.  The  same  situa- 
tion is  more  or  less  true  of  all  regulative  fees  used  in  this 
way. 

Sheriffs,  police,  and  city  judges  have  often  been  paid 
on  a  fee  basis,  with  the  expectation  that  they  would  be 
more  alert  to  duty.  If  paid  so  much  per  arrest  it  is  likely 
that  the  policeman  will  be  more  alert  to  find  criminals— 
it  will  be  to  his  interest  to  develop  crime  rather  than  to 
prevent  and  repress  it.  The  attitude  of  other  officials 
will  be  much  the  same  when  their  remuneration  is  the  fee. 
The  judge  will  be  interested  in  trying  more  cases,  the  sheriff 
in  having  more  commitments  to  his  keeping.  Each  official 
act  means  a  fee,  hence  a  larger  income.  It  is  to  the  in- 
terest of  the  officials  to  increase  crime  rather  than  to  pre- 
vent it.  Examples  are  numerous  of  where  the  sheriff  of 


FEES,  SPECIAL  ASSESSMENTS,  REVENUES    129 

one  county  has  sought  to  exceed  the  hospitality  of  the 
sheriffs  of  adjoining  ones  in  order  to  obtain  more  fees  for 
keeping  vagrants.  A  tramp  was  always  welcome,  and  the 
longer  he  stayed  the  bigger  the  fee.  Most  states  have 
overthrown  the  system,  yet  in  some  it  seems  to  be  so 
deeply  embedded  as  to  be  a  fixture. 

Where  a  magistrate  receives  a  fee  for  his  services,  jus- 
tice is  likely  to  be  warped.  This  system  of  payment  has 
been  given  up  in  most  of  the  larger  tribunals,  yet  it  re- 
mains in  some  of  the  smaller,  such  as  those  of  the  justice 
of  the  peace.  The  temptation  exists  to  give  the  decision 
in  favor  of  the  plaintiff,  for  if  such  a  reputation  is  gained 
that  justice  of  the  peace  will  get  more  and  more  cases  to 
try,  for  anyone  bringing  suit  would  much  prefer  such  a 
justice  to  one  who  had  given  many  decisions  in  favor  of 
defendants. 

Political  Corruption. — The  payment  of  officials  by  fees 
has  been  the  cause  of  much  political  corruption.  Sums 
entirely  out  of  proportion  to  the  duties  required  have 
been  received,  and  are  still  received  where  the  system 
remains.  Such  positions  make  desirable  political  plums 
to  be  given  to  the  ward  boss,  who  can  afford  to  go  almost 
any  length  to  secure  the  lucrative  position.  Reform  comes 
slowly,  because  the  party  in  power  has  given  the  plums 
in  fulfillment  of  promises,  while  the  defeated  party  is 
promising  to  give  them  with  the  hope  of  gaining  power. 

These  social  and  political  evils  have  no  doubt  had  a  big 
influence  in  arousing  sentiment  to  abolish  fee  payments 
to  officials.  The  Central  and  Western  states  have  taken 
the  lead,  but  much  remains  to  be  done  in  the  Southern 
and  Eastern  sections.  It  is  here  that  the  system  has  be- 
come so  deeply  intrenched  in  the  political  machinery  as 
to  be  hard  to  remove. 

77.  Special  Assessments  Resemble  Taxes  and  Fees. — 
A  third  form  of  revenue  that  forms  an  important  part  of 
fiscal  systems,  especially  those  of  municipalities,  is  what 
is  known  as  the  special  assessment.  It  is  a  payment  re- 


130  OUTLINES  OF  PUBLIC  FINANCE 

quired  from  owners  of  property  because  the  property  has 
been  specifically  benefited  by  some  public  improvement. 
A  special  assessment  might  be  defined  as  a  compulsory  levy 
against  property  in  proportion  to  the  benefits  which  have 
accrued  to  it  because  of  some  service  undertaken  for  the  public 
good.  Usually  the  funds  exacted  are  expected  to  be  used 
in  defraying  all  or  part  of  the  cost  of  the  service.  Examples 
most  familiar  to  American  students  are  the  levies  made 
upon  property  by  municipalities  when  streets  are  paved 
or  sidewalks  built. 

Special  Assessments  and  Taxes. — In  some  respects  spe- 
cial assessments  resemble  taxes,  yet  they  are  so  dissimilar 
as  to  warrant  a  separate  classification.  The  primary 
object  of  the  levy,  as  in  the  case  of  taxes,  is  some  common 
benefit.  Special  assessments  are  also  similar  to  taxes  in 
that  the  payment  is  compulsory,  while  the  levy  is  a  legal 
process  according  to  some  general  rule.  A  marked  differ- 
ence appears,  however,  in  the  measure  of  the  individual 
benefit  which  the  payee  receives.  Taxes  are  paid  without 
reference  to  specific  individual  benefits,  while  in  the  case 
of  special  assessments  the  basis  of  the  levy  is  the  benefit 
which  accrues  to  the  property.  The  purpose  for  which 
taxes  are  levied  is  usually  more  general  and  immaterial— 
that  is  for  all  sorts  of  general  expenses — while  the  special 
assessment  is  for  a  definite  purpose,  usually  of  a  material 
nature,  which  adds  to  the  capital  account  of  the  govern- 
ment. In  modern  taxes  much  concern  is  given  to  the 
ability  of  the  payee  to  bear  burdens,  while  the  special 
assessment  is  based  entirely  on  the  individual  benefit 
derived  from  the  improvement  to  property. 

Special  Assessments  and  Fees. — Certain  similarities  exist 
between  the  fee  and  the  class  of  revenue  under  discussion, 
yet  again  the  differences  are  such  as  to  warrant  a  separate 
classification.  Both  are  levied  by  government  authority, 
and  both  represent  a  payment  for  individual  benefit  re- 
ceived. The  field  for  the  use  of  the  special  assessment  is 
limited,  however,  while  that  for  the  fee  is  almost  unlim- 


FEES,  SPECIAL  ASSESSMENTS,  REVENUES    131 

ited.  The  former  is  a  local  phenomenon,  and  always  in- 
volves improvement  to  property;  the  latter  is  restricted 
to  neither  locality  nor  property,  but  is  usually  general  and 
personal.  Payments  of  a  fee  levy  will  continue  to  be  made 
with  each  repetition  of  the  service,  which  may  be  frequent 
or  seldom,  and  there  is  no  defmiteness  as  to  how  much 
these  levies  will  bring  to  the  treasury.  A  special  assess- 
ment is  a  definite  levy  made  once  for  all,  while  the  exact 
amount  to  be  received  is  a  part  of  the  calculation.  Be- 
cause of  these  characteristics  it  adds  to  clearness  to  sep- 
arate special  assessments  from  both  taxes  and  fees. 

Special  Taxes  and  Special  Assessments. — One  should  be 
careful  to  distinguish  between  special  taxes  and  special 
assessments.  Special  taxes  are  those  which  are  levied,  the 
expenditure  of  which  will  be  for  some  particular  purpose, 
such  as  school  taxes,  or  road  taxes.  The  expenditure  is 
presumably  made  in  the  district  where  the  tax  is  collected. 
The  special  taxes  are  usually  levied  upon  the  same  base 
as  other  taxes,  without  reference  to  any  individual  benefit 
which  might  be  calculated  to  arise  from  their  expenditure. 
The  wealthy  unmarried  man  would  be  assessed  for  a 
special  school  tax,  while  a  poor  man  with  several  children 
in  school  might  escape.  The  special  assessment  is  levied 
for  a  special  purpose,  but  upon  those  whom  the  f ulfillment 
of  the  purpose  will  benefit. 

78.  The  Special  Assessment  Has  Been  Used  More  Ex- 
tensively in  the  United  States  than  in  Europe. — The  first 
example  of  a  levy  of  the  nature  of  a  special  assessment 
may  be  found  in  Europe,  yet  the  real  development  of  the 
system  can  be  traced  through  the  American  colonies  and 
states.  As  early  as  the  latter  part  of  the  seventeenth  cen- 
tury provision  was  made  in  New  York  for  the  use  of  the 
principle.  It  did  not,  however,  receive  extensive  develop- 
ment here,  nor  was  it  copied  to  any  extent  elsewhere  until 
well  into  the  nineteenth  century.  The  real  impetus  to 
its  use  came  with  the  growth  of  internal  improvements. 
At  present  its  most  prominent  place  is  found  in  municipal 


132  OUTLINES  OF  PUBLIC  FINANCE 

finances,  although  its  use  by  counties  and  states  is  in- 
creasing with  the  demand  for  building  improved  roads. 
In  a  number  of  cities,  at  various  times,  the  receipts  from 
special  assessments  have  exceeded  those  from  taxes.  Some 
of  the  many  purposes  for  which  it  is  used  are  for  laying 
out  and  building  streets,  sidewalks,  and  roads,  for  light- 
ing and  sprinkling  streets,  for  building  sewers  and  laying 
water  pipes,  for  planting  shade  trees,  and  for  developing 
parks. 

The  special  assessment,  or  betterment  tax,  is  compara- 
tively little  used  in  European  countries,  although  numer- 
ous attempts  have  been  made  to  have  it  introduced  more 
extensively.  Great  Britain  has  perhaps  been  more  an- 
tagonistic than  other  countries,  and  practically  all  at- 
tempts to  use  the  principle  have  met  with  such  objections 
that  they  have  been  given  up.  One  situation  which  makes 
its  use  more  difficult  is  that  land  or  site  values  are  seldom 
used  in  levying  taxes;  the  tax  is  levied  on  the  base  of 
annual  rental  upon  the  occupier  rather  than  upon  the 
owner  of  the  land.  The  " iniquitous  American  scheme" 
is  gaining  ground,  however,  and  is  used  to  a  greater  extent 
in  the  countries  on  the  continent. 

79.  The  Justice  of  Special  Assessments  Has  Not  Been 
Destroyed  by  Difficulties  Encountered  in  Their  Use. — 
Some  difficulties  have  arisen  in  the  use  of  the  special  as- 
sessment. A  number  of  these  difficulties  constitute  the 
chief  objections  that  Europeans  have  to  the  principle. 
One  which  quickly  suggests  itself  is  that  of  making  an 
assessment  in  proportion  to  the  increase  in  property  value, 
and  in  determining  the  proper  district  over  which  to  make 
the  levy.  The  paving  of  a  street  benefits  not  only  abutting 
property,  but  also  property  in  the  immediate  vicinity. 
An  expression  commonly  used  is,  "only  a  block  from  a 
paved  street."  Evidently  property  in  the  vicinity  of  a 
paved  street  is  enhanced  in  value,  even  though  an  exact 
measure  of  the  increase  may  be  difficult.  The  base  upon 
which  the  levy  is  to  be  made  is  also  troublesome  at  times. 


FEES,  SPECIAL  ASSESSMENTS,  REVENUES    133 

Frontage  is  often  used,  but  this  is  sometimes  so  obviously 
unjust  that  area  or  selling  value  may  also  be  considered. 

It  has  been  objected,  frequently,  that  the  use  of  the 
special  assessment  is  dangerous  because  it  may  compel 
the  property  owners  to  meet  the  expense  of  improvements 
which  the  nonproperty  owners  may  desire,  or  that  exorbi- 
tant assessments  may  be  placed  by  unscrupulous  poli- 
ticians under  the  guise  of  conferring  a  benefit.  In  so  far 
as  the  assessment  is  measured  by  the  actual  benefit  to 
property,  the  first  objection  can  have  but  little  weight. 
The  improvements  will  mean  increased  differentials  which 
will  be  reflected  in  higher  rents,  so  that  much  of  the 
burden  will  rest  on  the  nonproperty  owning  class  if  paying 
for  a  benefit  actually  received  can  be  called  a  burden. 
Much  fraud  and  injustice  have  arisen  in  making  special 
assessments,  and  there  is  no  doubt  that  the  amount  ex- 
acted has  often  been  far  in  excess  of  any  benefits  accruing 
to  property.  Anyone  familiar  with  the  Tweed  rule  in 
New  York  City  has  sufficient  evidence  of  this.  The  de- 
cision of  the  courts,  however,  that  any  exaction  in  excess 
of  benefits  is  taking  of  property  without  just  compensa- 
tion, has  done  much  to  alleviate  this  difficulty. 

The  principle  of  the  system,  in  spite  of  the  numerous 
difficulties,  has  appealed  so  much  to  the  sense  of  justice 
that  it  is  being  more  firmly  embedded  in  municipal  fiscal 
policies.  If  a  public  improvement  to  the  property  of  one 
individual  gives  an  increase  hi  value  which  does  not  come 
to  the  general  public,  it  is  but  just  that  some  return  should 
be  made  for  this  increased  value.  Great  care,  however, 
should  be  exercised  by  the  administrative  authorities  in 
fixing  the  assessment  district  and  in  determining  the  base 
and  amount  of  the  assessment,  so  as  to  alleviate  as  much 
as  possible  injustice  and  inequality.  This  admonition  ap- 
plies, however,  not  only  to  special  assessments,  but  to 
other  forms  of  revenue  as  well. 

80.  Prices  Are  Paid  for  Commercial  Services  Supplied 
by  the  Government. — Numerous  examples  occur  where 


134  OUTLINES  OF  PUBLIC  FINANCE 

the  state  supplies  services  of  a  commercial  nature  which 
might  be  supplied  by  individuals.  These  are  not  the  same 
in  all  countries,  nor  at  all  times  in  the  same  country. 
Where  services  are  thus  supplied,  they  are  usually  such 
as  are  given  by  the  post  office,  waterworks,  gas  plants, 
lighting  plants,  telegraphs,  telephones,  railroads,  canals, 
and  other  industries  of  a  similar  nature.  They  are  the 
industries  in  which  the  degree  of  public  interest  is  large, 
and  in  which  the  reason  for  the  government's  taking  over 
the  industry  is  usually  other  than  to  secure  revenue. 

Governments  may,  however,  conduct  an  industry  so  as 
to  get  the  highest  revenue;  that  is,  in  the  same  manner 
as  an  individual  would  conduct  it.  Various  government 
monopolies,  such  as  the  French  tobacco  monopoly,  the 
Indian  opium  monopoly,  or  the  older  salt  monopolies,  are 
examples  of  this  condition.  The  public  interest  is  negli- 
gible, and  the  consumer  buys  from  the  state  on  the  same 
basis  as  if  he  were  buying  from  an  individual.  There  is 
no  benefit  in  state  ownership  except  that  it  is  getting  re- 
turns from  industry  that  otherwise  would  go  to  individ- 
uals. The  charge  is  made  on  the  same  principle  as  if  it 
had  been  made  by  private  management,  and  has  been 
called  a  quasi-private  price. 

Nature  of  Public  Price. — Generally,  however,  when  a 
government  takes  over  an  industry,  the  item  of  revenue 
is  not  the  only  consideration — in  fact,  it  is  usually  inci- 
dental. The  feeling  exists  that  the  general  public  has  an 
interest  in  the  conduct  of  the  industry  which  an  individ- 
ual operator  cannot  or  will  not  recognize.  It  is  to  supply 
the  demands  of  this  public  interest  that  the  industry  is 
run  by  the  government,  and  the  amount  charged  for  the 
service  is  known  as  a  public  price.  A  public  price  might 
be  defined,  therefore,  as  a  more  or  less  voluntary  payment, 
made  for  a  commercial  service,  by  individuals  who  receive  a 
special  benefit  from  the  service.  The  word ' '  rate ' '  has  some- 
times been  used  to  designate  this  charge,  but  this  only 
adds  greater  confusion  to  the  already  too  numerous  mean- 


FEES,  SPECIAL  ASSESSMENTS,  REVENUES    135 

ings  of  "rate."  Various  charges  are  known  as  rates,  as 
passenger  and  freight  rates,  there  is  also  the  rate  of  tax- 
ation, while  in  England  the  local  taxes  are  known  as 
"rates." 

The  amount  of  the  public  price  is  usually  governed  by 
the  degree  of  public  interest  in  the  conduct  of  the  industry. 
If  the  public  interest  is  negligible,  as  has  already  been 
indicated,  the  basis  of  the  charge  will  be  the  same  as  if 
the  industry  were  in  the  hands  of  an  individual.  If  the 
conduct  of  the  industry  becomes  of  more  importance  to 
the  general  public,  the  price  charged  may  be  reduced 
until  the  service  is  given  at  cost.  As  the  public  concern 
becomes  more  vital,  the  charges  are  reduced  until  the  re- 
turns do  not  begin  to  meet  the  cost.  In  this  situation  the 
price  partakes  somewhat  of  the  nature  of  a  fee.  The  dif- 
ference remains,  however,  that  the  payment  of  the  price 
is  voluntary — that  is,  a  man  may  ride  on  the  municipally 
owned  street  railway  and  pay  the  price,  but  he  may  avail 
himself  of  any  other  means  of  going  to  town  he  may  choose, 
and  not  pay  the  price.  In  the  case  of  fees,  the  avenue  for 
supplying  the  service  is  usually  limited  to  the  government, 
while  in  the  case  of  a  price  many  avenues  may  be  avail- 
able. The  deficit  is  made  up  from  general  taxes.  The 
government  may  even  go  so  far  as  to  make  no  charge  to 
the  recipients,  and  meet  all  expenses  from  the  general 
tax  fund.  In  such  cases  the  interest  of  the  industry  to  the 
public  is,  or  should  be,  of  paramount  importance. 

Reduction  in  Public  Prices. — The  general  tendency  has 
been  toward  a  reduction  in  public  prices.  Examples  may 
be  found  representing  the  various  conditions  of  charge 
from  the  quasi-private  price  down  to  where  no  individual 
charge  is  made  for  the  service.  Public  education,  as  has 
been  previously  indicated,  has  passed  through  the  various 
stages,  and  the  cost  is  now  met  out  of  the  common  fund. 
The  same  is  true  of  the  maintenance  of  highways  and 
bridges,  while  a  few  years  ago  the  cost  was  partially  met 
from  tolls,  The  public  interest  has  varying  effects  on 


136  OUTLINES  OF  PUBLIC  FINANCE 

postal  charges,  as  has  previously  been  pointed  out.  Postal 
rates  indicate  that  some  parts  of  a  service  may  be  con- 
sidered as  of  greater  public  interest  than  others,  and 
prices  are  fixed  accordingly.  In  this  way  low  magazine 
rates,  and  postage-free  newspapers  within  the  county  of 
publication,  can  be  justified.  Likewise,  no  individual 
charge  is  usually  made  for  water  used  in  sprinkling  the 
streets.  There  is  no  doubt  that  this  tendency  will 
continue,  and  that  a  greater  amount  of  services  will  be 
given  by  the  government,  the  cost  of  which  will  be  partly 
or  entirely  met  from  general  taxes. 

81.  States  Have  Sources  of  Revenue  of  Minor  Impor- 
tance.— Taxes,  fees,  special  assessments,  and  prices 
charged  for  commercial  products  compose  by  far  the 
larger  part  of  revenues.  A  few  sources  of  minor  impor- 
tance exist,  however,  which  should  be  noted.  Some  held 
a  prominent  place  in  earlier  fiscal  systems,  but  have 
gradually  lost  their  importance. 

Gifts. — A  form  of  revenue  of  this  character  is  gifts. 
Most  political  units  still  receive  gifts,  but  they  are  usually 
for  some  particular  purpose,  such  as  a  library,  hospital,  or 
educational  building.  Oftentimes  it  takes  the  form  of  a 
trust  fund  for  some  definite  purpose.  A  form  of  gift  of 
less  importance  makes  up  the  "  conscience  fund."  Indi- 
viduals often  repent  of  having  defrauded  the  government 
and  will  send  in,  perhaps  years  afterward,  a  sum  to 
square  themselves  with  the  government  and  to  ease  their 
conscience.  Often  these  gifts  are  so  small  that  the  cost 
of  the  clerical  work  in  properly  recording  them  makes 
this  an  expensive  form  of  revenue. 

Escheat  and  Eminent  Domain. — Property  may  come  into 
the  hands  of  the  state  by  escheat  or  reversion,  or  by  the 
exercise  of  the  right  of  eminent  domain.  The  amount 
received  under  the  first  category  is,  of  course,  inconsider- 
able, for  there  is  little  property  that  cannot  be  claimed 
by  some  other  ownership  than  the  state.  In  exercising 
the  right  of  eminent  domain  net  revenue  is  not  expected 


FEES,  SPECIAL  ASSESSMENTS,  REVENUES    137 

to  accrue,  since  a  just  compensation  is  expected  to  be 
given  in  return  for  the  property.  If  the  property  thus 
secured  should  increase  in  value  over  a  period  of  time,  and 
then  be  sold,  the  state  would  be  the  gainer. 

Penalties  and  Fines. — Receipts  from  penalties  and  fines 
are  found  in  all  governmental  units,  and  frequently  amount 
to  sums  which  are  not  inconsiderable.  They  are  levied, 
not  with  the  idea  of  getting  revenue,  but  against  some  one 
who  has  committed  a  misdeed.  It  is  expected  that  the 
penalty  or  fine  will  act  as  a  deterrent  against  violation  of 
law.  They  come  under  the  penal  power  of  the  government, 
and  the  amounts  thus  secured  are  so  variable  that  they 
are  not  usually  seriously  considered  as  a  part  of  fiscal 
systems. 

ADDITIONAL  BEADING 

Seligman,  Essays  in  Taxation,  chaps,  xiv,  xv. 
Urdahl,  Fee  System  in  tJie  United  States. 
Rosewater,  Special  Assessments. 


CHAPTER  VII 

EEVENUE   SYSTEMS   OF   IMPORTANT  COUNTRIES 

82.  Modern  Revenue  Systems  Have  Developed  Since 
Feudalism. — Many  early  states,  such  as  Greece  and  Rome, 
furnish  examples  of  well-developed  fiscal  systems.  With 
the  growth  of  feudalism,  however,  their  importance  waned, 
since  under  this  regime  the  ruler  had  direct  command 
over  a  large  amount  of  economic  goods  and  services. 
The  burden  imposed  upon  the  individuals  was  often  heavy 
—in  fact,  it  was  ordinarily  no  less  than  the  burden  im- 
posed by  modern  taxes.  Money  economy  had  not  yet 
developed,  and  these  payments  were  made  in  kind.  As 
money  began  to  be  used,  and  as  the  functions  of  the  state 
began  to  be  widened,  a  number  of  monetary  payments 
appeared  which  at  first  were  considered  as  commutations 
for  some  of  the  older  feudal  dues. 

The  first  payments  were  demanded  for  such  services  as 
maintaining  roads  and  bridges,  for  protecting  travelers, 
and  for  the  privilege  of  importing  and  exporting  goods. 
It  was  not  long  until  taxes  were  levied  upon  land  and 
other  marks  of  ability  to  bear  tax  burdens.  The  early 
base  of  most  importance,  other  than  land,  was  some  form 
of  building  tax,  sometimes  upon  the  building  itself,  and 
sometimes  upon  some  distinctive  part,  such  as  windows 
or  hearth.  It  is  interesting  to  note  that  the  payment  of 
these  early  taxes  was  looked  upon  as  an  indication  of  ser- 
vility. No  direct  taxes  were  at  first  levied  upon  the  free- 
men. The  influences  of  this  policy  may  still  be  seen  in 
the  methods  of  making  assessments  in  some  European 
countries. 


REVENUE  SYSTEMS  OF  IMPORTANT  COUNTRIES  139 

Agriculture,  in  some  form,  was  the  predominant  indus- 
try for  many  years.  While  this  was  true,  taxes  based 
upon  land  were,  to  a  large  degree,  satisfactory,  and  com- 
plied reasonably  well  to  principles  of  justice.  Land,  how- 
ever, did  not  continue  to  be  the  sole  source  of  income. 
Commercial  pursuits,  and  other  trades  and  crafts  devel- 
oped, which  made  it  possible  to  secure  a  living,  and  more, 
without  owning  or  directly  using  land.  The  governments 
began  to  extend  their  services,  which  meant  the  need  for 
more  revenues.  It  seemed  expedient  to  secure  a  part  of 
the  increased  revenue  from  these  new  forms  of  wealth, 
and  the  early  tax  systems  of  various  countries  indicate  a 
branching  out  to  new  sources  of  revenue.  The  develop- 
ment was  not  always  the  same,  and  different  taxes  were 
used  in  different  countries.  It  will  be  instructive  to  trace 
briefly  the  development  of  the  tax  system  in  some  of  the 
more  important  countries. 

83.  Early  Taxes  in  England  Took  a  Variety  of  Forms. — 
Some  of  the  first  taxes  in  England  took  the  form  of  com- 
mutations. One  of  the  earliest  was  known  as  the  ship- 
geld.  When  the  country  was  threatened  with  invasion, 
the  coast  towns  were  expected  to  furnish  ships  to  aid  in 
the  defense.  If,  for  any  reason,  they  did  not  do  this,  the 
tax  was  levied,  and  was  used  exclusively  for  naval  pur- 
poses. This  might  be  looked  upon  as  a  commutation  for 
naval  services.  An  interesting  early  revenue,  while  not 
exactly  a  commutation,  was  the  Dane-geld.  It  was  levied 
upon  land,  and  paid  as  tribute  to  the  Danes  to  keep  them 
from  invading  the  coasts  of  England. 

The  taxes  just  mentioned  were  levied  to  secure  particu- 
lar services,  and  the  persons  taxed  were  exempt  from 
personally  rendering  the  service.  A  number  of  early 
taxes,  however,  were  levied  to  secure  revenue  for  general 
purposes.  One  of  the  earliest  of  these  was  the  hearth 
tax.  This,  in  effect,  was  a  tax  on  the  family,  and  was 
used  for  a  long  period  of  time.  Need  for  increased  rev- 
enue led  to  the  adoption  of  still  other  taxes,  One  of  the 


140  OUTLINES  OF  PUBLIC  FINANCE 

first  was  upon  tenants  occupying  royal  lands.  It  was 
gradually  extended  until  it  applied  to  all  rents.  It  varied 
at  different  times,  and  the  tax  was  often  known  by  the 
amount  taken,  as  " fifteenths"  and  " tenths."  At  times 
these  taxes  were  supplemented  or  replaced  by  some  form 
of  poll  tax.  The  exemptions  from  poll  taxes  were  few, 
since  they  were  levied  upon  all  men  and  women  above  a 
certain  age,  actual  beggars  alone  being  excluded.  It  is 
interesting  to  note,  however,  that  these  poll  taxes  were 
often  graduated  on  the  basis  of  property.  Some  of  the 
more  popular  rulers  secured  special  funds  from  the  richer 
classes,  which  were  termed  "  benevolences."  Another 
fruitful  source  of  funds  which  was  extensively  used  at 
various  times  was  the  charge  made  for  granting  industrial 
monopolies.  The  field  open  to  competitive  industry  was 
at  times  extremely  limited,  and  the  burden  placed  upon 
the  consumers  of  products  was  severely  felt. 

Besides  all  these  forms  of  direct  taxes,  duties  were  levied 
upon  goods  which  came  in  or  left  the  country,  and  that 
they  were  generally  found  as  a  part  of  the  fiscal  system 
can  be  seen  from  the  fact  that  they  were  called  "  cus- 
tomary duties."  The  modern  expression,  "customs 
duties,"  had  its  origin  in  this  early  phrase. 

84.  Later  English  Taxes  Are  More  Permanent. — Many 
of  the  direct  taxes  which  are  indicated  above  were  grad- 
ually given  up,  while  the  most  important  one — a  direct 
tax  on  land — became  a  permanent  source  of  revenue.  No 
very  definite  policy  was  followed  in  levying  the  tax.  In 
order  to  secure  more  revenue  from  larger  payments,  the 
privilege  was  often  granted  of  commuting  all  future  taxes 
by  a  single  payment.  Such  a  policy,  of  course,  was  ill 
advised,  since  it  used  for  present  purposes  what  should 
have  been  kept  for  future  needs. 

Land  Assessment. — The  land  tax  continued  to  be  an 
important  part  of  the  fiscal  system.  In  the  course  of  de- 
velopment, assessments  began  to  be  made  on  some  definite 
basis,  and  the  easiest  was  that  of  area.  The  injustice  of 


REVENUE  SYSTEMS  OF  IMPORTANT  COUNTRIES  141 

this  soon  became  apparent,  and  the  gross  product  was 
substituted.  Gradually,  however,  the  net  product  was 
brought  to  the  front,  and  this  still  remains  the  base. 
Taxes  are  regarded  as  a  charge  upon  rentals,  since  land 
values  are  calculated  in  terms  of  rents,  rather  than  in 
terms  of  selling  price.  " Twenty  years'  purchase77  is  an 
expression  little  used  in  America,  yet  common  in  England. 

Income  Tax. — The  wars  hi  which  England  engaged 
about  the  first  of  the  nineteenth  century  created  a  demand 
for  more  revenue  than  was  being  supplied  by  the  existing 
sources.  It  was  then  that  the  income  tax  was  introduced, 
a  form  of  taxation  which  has  since  occupied  an  important 
place  in  the  fiscal  machinery.  The  provisions  of  some  of 
the  early  laws  appear  decidedly  modern.  A  simple  de- 
gressive scheme  was  used — a  fixed  exemption  was  allowed, 
and  a  proportionate  rate  was  levied  upon  the  remainder. 
With  incomes  of  a  certain  nature,  such  as  salaries  and 
rents,  the  tax  was  to  be  deducted  before  the  income  was 
turned  over  to  the  owner.  This  method  is  known  as  col- 
lection at  source.  With  other  classes  of  income,  a  declara- 
tion of  the  amount  of  income  was  to  be  made,  and  the  tax 
levied  upon  this.  In  cases  where  there  had  been  a  pay- 
ment at  source,  while  the  entire  income  was  less  than  the 
granted  exemption,  the  person  from  whose  income  the 
tax  had  been  taken  was  to  be  reimbursed  by  the  govern- 
ment.1 

Except  for  a  few  years,  the  income  tax  has  continued 
to  be  used  extensively,  and  to-day,  combined  with  prop- 
erty taxes,  forms  the  most  important  part  of  the  revenue 
system.  Inheritance  taxes,  or  "  death  duties,"  as  they 
are  called  in  England,  also  form  a  part  of  the  fiscal  system. 
Some  old  land  and  building  taxes  are  still  used,  but  are 
relatively  unimportant. 

Customs  Duties. — The  attitude  taken  toward  customs 


1 A  detailed  discussion  of  these  methods  of  levying  an  income  tax,  to- 
gether with  a  discussion  of  tho  present  English  income  tax,  is  given  in 
Chapter  XII. 


142  OUTLINES  OF  PUBLIC  FINANCE 

duties  is  an  interesting  phase  in  England's  fiscal  develop- 
ment. The  importance  of  their  early  use  has  already  been 
indicated.  About  the  middle  of  the  nineteenth  century, 
however,  after  considerable  agitation  and  opposition,  the 
protective  principle  was  largely  removed  from  the  tariff 
laws,  and  at  the  same  time  any  protective  feature  in  the 
remaining  duties  was  offset  by  the  excise  duties.  The  agi- 
tation for  such  action  was  from  the  classes  who  wished  to 
foster  an  .extension  of  trade  and  who  considered  that 
much  of  the  misery  of  the  lower  classes  was  due  to  the 
protective  laws. 

The  agitation  for  the  reduction  of  duties  centered  around 
the  repeal  of  the  corn  laws.  These  had  been  kept  in  force 
to  secure  higher  prices  for  the  products  of  land  so  it  could 
more  ably  meet  the  taxes  which  were  imposed  upon  it. 
Since  the  repeal  of  these  laws,  protective  duties  have  had 
no  very  important  place  in  England's  fiscal  policy.  Her 
tariff  schedules  are  primarily  for  revenue,  are  composed  of 
few  commodities,  and  are  comparatively  simple. 

Local  Taxes. — Contrary  to  the  situation  in  most  Euro- 
pean countries,  the  local  taxes  of  England  have  always 
been  more  or  less  separated  from  the  influence  of  the  cen- 
tral authorities.  The  levies  are  made  and  collected  by 
local  authorities  for  the  use  of  the  local  district.  The  taxes 
are  often  levied  for  particular  needs,  and  are  known  by 
the  purpose  for  which  the  levy  is  made,  as,  for  example, 
the  poor  rates.  Land  in  some  form  was  at  first  the  prin- 
cipal base  of  assessment,  but  other  bases  have  developed. 
Some  indirect  taxes  are  also  used  in  securing  funds  for  the 
different  localities. 

85.  Indirect  Taxes  Play  an  Important  Role  in  the  Fiscal 
System  of  France. — The  feudal  period  in  France,  as  in 
England,  contained  a  number  of  exactions  for  the  govern- 
ment. These  were  generally  upon  land,  and  were  more  of 
the  nature  of  rents  than  of  taxes.  As  feudalism  disinte- 
grated and  government  activities  increased,  larger  rev- 
enues became  imperative.  Taxes  upon  articles  of  con- 


REVENUE  SYSTEMS  OF  IMPORTANT  COUNTRIES  143 

sumption  were  extensively  used.  Because  of  the  general 
acceptance  of  the  mercantilist  doctrine,  charges  were  also 
levied  upon  imported  goods.  These  taxes  formed  the 
most  important  part  of  the  early  French  revenue  system. 
The  consumption  taxes  were  upon  such  articles  as  drinks, 
jewelry,  paper,  oil,  and  the  like.  Besides  taxes  upon  goods 
coming  into  the  country  they  were  often  levied  upon 
goods  which  were  brought  into  the  cities.  They  were 
levied  at  the  city  gates  and  were  called  gate  taxes. 

Early  Direct  Taxes. — A  number  of  more  or  less  direct 
taxes  also  found  a  place  in  the  early  fiscal  system.  Their 
form  resembled,  somewhat,  the  exactions  which  had  been 
made  under  feudalism.  One  of  the  earliest  taxes  used 
was  very  similar  to  the  modern  general  property  tax, 
since  land,  rentals,  and  various  sorts  of  property  were 
taken  as  the  measure  of  the  tax  which  was  to  be  paid.  A 
source  of  revenue  which  was  occasionally  used  was  a  sort 
of  income  tax.  It  was  one  or  more  twentieths  of  the 
income  from  land  or  other  property.  Somewhat  similar 
was  the  tax  exacted  for  the  benefit  of  the  church.  This 
was  a  certain  fraction,  not  always  the  same,  of  the  prod- 
ucts of  the  land,  and  was  to  be  paid  in  kind. 

An  interesting  demand  upon  the  people  was  that  of 
services  for  the  maintenance  of  highways  and  other  forms 
of  public  utilities.  The  levies  were  made,  both  upon 
property  and  upon  persons.  No  classes  were  exempt,  yet 
some  could  commute  into  a  money  payment  or  hire  some 
one  else  to  perform  the  service.  The  tax  upon  salt  really 
amounted  to  a  direct  tax,  since  it  was  stipulated  how  much 
salt  should  be  purchased  for  each  member  in  a  family. 
Poll  taxes  were  used  in  varying  degree.  The  amount  to 
be  assessed  was  based  upon  a  number  of  items,  such  as 
rank,  property,  and  amount  of  other  taxes  paid.  There 
were  a  number  of  classes,  usually  determined  on  the  basis 
of  ability  to  pay.  Occasionally  certain  classes,  such  as 
the  clergy,  were  exempt. 

Modern   Indirect    Taxes. — The   modern   fiscal   system 


144  OUTLINES  OF  PUBLIC  FINANCE 

closely  resembles  the  early  one.  Indirect  taxes  form  a 
relatively  important  place  and  yield  much  more  revenue 
than  do  the  direct  taxes.  The  extensive  use  of  this  form 
of  taxes  is  easily  accounted  for.  The  need  for  increased 
revenues  has  grown  rapidly,  while  the  lack  of  political 
solidarity  in  the  country  has  been  marked.  When  such 
a  condition  exists  it  is  imperative  for  the  party  in  power 
to  conceal  the  taxes  as  much  as  possible  in  order  to  keep 
the  burdens  from  being  felt,  and  thus  prevent  dissatisfac- 
tion and  perhaps  rebellion  on  the  part  of  the  constituency. 

Taxes  upon  the  consumption  of  goods  still  hold  an  im- 
portant place  in  the  revenue  system.  Some  of  the  more 
characteristic  objects  taxed  are  wines,  liquors,  salt,  sugar, 
and  tobacco.  The  old  gate  taxes  are  still  maintained  by  a 
number  of  cities,  both  for  raising  their  own  revenue  and 
for  that  apportioned  upon  them  by  higher  governmental 
units.  The  collection  of  a  tax  through  a  government 
monopoly  is  well  illustrated  by  the  French  tobacco  mo- 
nopoly. The  government  does  not  own  the  entire  process 
of  production,  but  closely  regulates  and  supervises  every 
step,  fixes  the  rate  of  pay  for  the  workers  and  the  selling 
price  of  the  product. 

Modern  Direct  Taxes. — It  must  not  be  inferred,  how- 
ever, that  direct  taxes  do  not  occupy  an  important  place 
in  the  French  fiscal  policy.  A  number  of  these  taxes  exist, 
and  are  modified  to  meet  varying  needs.  The  more  im- 
portant are  the  taxes  levied  upon  real  estate,  upon  doors 
and  windows,  the  business  tax,  and  a  combination  poll 
and  building  rental  tax.  Besides  these,  numerous  fee  pay- 
ments are  required,  such  as  for  inspection,  certification, 
licensing  vehicles,  and  similar  services. 

The  importance  of  the  French  business  taxes  will  be 
taken  up  in  a  subsequent  chapter.  The  other  direct  taxes 
are,  to  a  great  extent,  apportioned  taxes.  The  tax  on 
land  formerly  included  any  assessment  of  buildings  which 
was  attempted.  Later,  a  separate  tax  was  adopted  for 
these  two  forms  of  property,  and  a  different  method  of 


REVENUE  SYSTEMS  OF  IMPORTANT  COUNTRIES  145 

levy  v/as  provided.  The  door  and  window  tax  is  used  to 
supplement  the  land  and  building  tax,  and  is  an  attempt 
to  raise  additional  revenue  from  those  who  are  able  to 
pay.  A  large  number  of  windows  and  doors  is  considered 
as  indicative  of  wealth,  and  consequently  of  taxpaying 
ability.  The  combination  poll  and  rental  tax  is  designed 
to  fall  upon  what  is  generally  termed  personal  property, 
as  well  as  upon  the  individual.  The  poll  tax  is  a  definite 
amount,  and  levied  upon  each  individual,  with  some  ex- 
emptions. The  rental  tax  represents  the  elastic  feature, 
and  is  large  or  small,  according  to  the  needed  revenue, 
after  the  poll  tax  has  been  collected. 

86.  The  Prussian  Tax  System  Has  Had  a  Systematic 
Development. — Most  tax  reforms  have  been  spasmodic 
and  have  come  as  the  result  of  necessity  rather  than  of 
deliberation.  Often  changes  have  been  made  to  lighten 
the  burden  on  particular  classes  of  persons  who,  for  the 
time  being,  held  the  balance  of  power.  It  is  often  neces- 
sary to  secure  revenue,  and  the  most  expedient  plan  has 
been  the  one  most  generally  used,  with  little  thought  as 
to  the  justice  of  the  scheme  itself,  or  its  relation  to  other 
methods  of  raising  revenue  which  may  be  in  use.  This 
characterization  is  true,  to  some  degree,  of  every  country, 
but  is  less  applicable  to  Prussia  than  to  any  other.  This 
is  because  a  number  of  students,  from  an  early  period, 
made  careful  investigations  and  calculations  as  to  what 
the  tax  system  should  be.  In  framing  fiscal  measures 
the  government  used  either  these  authorities  or  people 
trained  by  them.  Consequently  the  fiscal  system  devel- 
oped along  carefully  predetermined  lines  and  embodies 
such  ideals  of  justice  as  careful  study  and  investigation 
would  warrant. 

Early  Revenues. — The  systematic  development  just  out- 
lined does  not  apply  to  the  early  revenues.  These  rev- 
enues existed  before  studies  could  be  made,  and  were 
secured  from  any  available  source.  In  some  parts  of  the 
country  the  methods  in  use  were  crude,  while  in  others,  as 


146  OUTLINES  OF  PUBLIC  FINANCE 

in  the  independent  cities  of  advanced  political  and  eco- 
nomic development,  the  fiscal  system  showed  much  more 
regularity.  The  real  need  for  revenues  was  felt  here,  as  in 
other  countries,  with  the  decline  of  feudalism.  Numerous 
occasions,  such  as  wars,  would  arise,  in  which  expenditure 
was  made  distinctly  for  the  common  benefit. 

Attempts  were  made  to  collect  the  needed  funds  from 
a  poll  tax,  levied  upon  individuals,  but  measured  by  the 
income  and  property  of  the  individual.  When  these  failed 
to  meet  the  needs,  the  officials  would  often  go  out  and  beg 
more  funds — hence  the  term  "bedes,"  which  was  applied 
to  these  early  revenues.  A  particular  set  of  "bedes,"  or 
voluntary  payments,  soon  became  a  fixed  charge,  while 
further  voluntary  payments  were  often  asked  for  par- 
ticular purposes.  It  was  a  system  of  gradually  converting 
a  voluntary  payment  into  a  fixed  one.  The  name  "bede" 
still  remains,  though  its  early  significance  is  lost.  Certain 
classes  were  exempt  from  these  payments,  but  were  fre- 
quently asked  to  donate  something  to  the  use  of  the 
state. 

Early  Reforms. — When  systematic  studies  began  to  be 
made,  agitation  for  reform  arose,  and  it  was  not  long 
before  some  of  the  suggestions  of  the  investigators  were 
adopted.  One  of  the  first  accomplishments  was  to  de- 
stroy the  old  feudal  relationship  between  the  tenant  and 
the  proprietor  of  land.  Many  changes  were  made  in  the 
kind  of  land  taxes  and  in  the  method  of  the  assessment. 
The  final  result  of  the  experiments  was  a  tax  upon  the 
net  rental  of  the  land. 

Throughout  the  early  development  the  tax  on  buildings 
was  included  as  a  part  of  the  land  tax.  When  net  rentals 
were  adopted  as  the  base  for  land  assessments,  however, 
the  taxation  of  buildings  was  put  in  a  separate  category. 
In  the  cities  the  rental  value  of  the  building  is  usually 
taken  as  the  base  for  assessment,  while  in  rural  communi- 
ties a  number  of  factors  are  considered.  Another  direct 
tax  which  received  wide  use,  and  which  has  been  very 


REVENUE  SYSTEMS  OF  IMPORTANT  COUNTRIES  147 

productive,  was  the  one  placed  upon  industries  of  various 
kinds.  Changes  in  industry  necessitated  many  changes 
in  this  form  of  revenue.  It  is  rather  remarkable  that, 
since  so  much  of  the  early  funds  was  secured  from  these 
sources,  later  all  three  were  given  over  to  the  smaller 
political  units,  and  the  revenue  collected  was  expended  for 
local  purposes. 

Consumption  and  Income  Taxes. — Consumption  taxes 
were  early  used  as  sources  of  revenue.  They  were  intro- 
duced with  the  abandonment  of  the  feudal  payments, 
were  placed  upon  necessities,  and  were  made  applicable 
alike  to  urban  and  rural  districts.  The  administrative 
problem  proved  so  difficult,  especially  in  the  country,  that 
it  was  not  long  before  poll  taxes  were  substituted  in  all 
but  a  few  localities.  Out  of  this  uniform  poll  tax  a  class 
tax  soon  developed.  Classes  were  formed  on  the  basis  of 
wealth,  profession,  and  other  characteristics,  and  each 
individual  of  a  particular  class  was  to  pay  a  definite 
amount.  These  taxes,  with  some  modifications  as  to 
classes  and  rates,  formed  the  most  important  part  of  the 
system  until  the  income  tax  was  introduced. 

The  income  tax  was  adopted  about  the  middle  of  the 
nineteenth  century,  and  since  then  has  supplanted  the 
former  class  taxes  in  importance,  although  the  latter  are 
still  used  to  some  extent.  The  scheme  for  taxing  incomes 
has  been  modified  with  attempts  to  more  nearly  approach 
ability  to  pay.  Progressive  rates  are  found,  not  only  for 
incomes  of  increasing  size,  but  also  on  incomes  from  prop- 
erty as  distinguished  from  incomes  from  labor.  As  might 
be  expected,  assessment  difficulties  have  been  hard  to 
eliminate.  A  more  detailed  study  of  the  Prussian  income 
tax  will  be  found  in  the  chapter  on  Income  Taxes. 

87.  Fiscal  Development  in  American  Colonies  Was  Not 
Uniform. — The  conditions  under  which  the  fiscal  systems 
of  the  Ajnerican  colonies  developed  possess  a  number  of 
distinctive  features.  Land  was  never  held  under  a  feudal 
regime,  but  could  always  be  bought  and  sold,  so  the  fiscal 


148  OUTLINES  OF  PUBLIC  FINANCE 

systems  were  not  modified  by  a  transition  to  private  own- 
ership. Some  payments  of  the  officials  in  earlier  Colonial 
history  resembled,  somewhat,  the  older  feudal  payments. 
Such  were  a  part  of  the  products  of  the  soil  which  were 
occasionally  collected. 

Another  situation  peculiar  to  the  colonies  was  that  they 
were  not  free  to  shape  a  fiscal  system  which  did  not  con- 
form to  the  ideas  of  the  Mother  country.  The  lack  of 
uniformity  in  industrial  pursuits,  moreover,  made  a  uni- 
form development  of  tax  measures  a  circumstance  not  to 
be  expected.  Consequently,  the  early  fiscal  development 
corresponds,  somewhat,  to  the  economic  characteristics 
which  distinguish  one  section  of  the  colonies  from  the 
others. 

Northern  Colonies. — Where  definite  forms  of  property 
developed,  this  was  taken  as  an  indication  of  ability  to 
pay  taxes,  and  some  form  of  a  property  tax  was  found. 
In  some  cases  specific  articles  were  stipulated  as  the  base 
upon  which  taxes  were  to  be  levied,  as  land,  horses,  or 
cattle;  in  others,  all  forms  of  property  were  taken  as  the 
base.  The  latter  condition  gradually  became  prevalent 
as  more  and  more  objects  were  added  to  the  taxable  list 
in  those  localities  where  only  specific  forms  of  property 
had  been  taxed. 

The  above  method  of  securing  revenue  is  best  illustrated 
in  the  Northern  colonies,  although  it  was  not  entirely  con- 
fined to  them.  Even  there  it  was  frequently  supplemented 
with  other  sources  of  revenue.  In  the  use  of  property  as 
a  base,  the  attempt  was  made  to  arrive  at  the  taxpaying 
ability  of  the  citizens,  and  a  number  of  the  early  laws 
state  that  the  measure  was  adopted  in  order  to  meet  the 
ability  to  bear  taxes.  It  was  on  this  ground  that  the 
extension  of  the  list  of  taxable  property  was  justified,  as 
well  as  the  inclusion  of  professional  classes,  such  as  law- 
yers, doctors,  and  others  whose  incomes  were  of  such  a 
nature  as  to  enable  a  tax  burden  to  be  met.  Some  use  was 
also  made  of  different  forms  of  indirect  taxes,  but  it  was 


REVENUE  SYSTEMS  OF  IMPORTANT  COUNTRIES  149 

of  little  importance  when  compared  with  the  taxes  on 
property.  Frequently,  also,  poll  taxes  were  found. 

Middle  and  Southern  Colonies. — Economic  conditions  of 
the  Middle  and  Southern  colonies  differed  from  those  of 
the  Northern  group.  Commerce  developed  much  earlier, 
and  continued  to  be  more  active.  The  small  farm  of  the 
North  gave  way  to  the  large  plantation  of  the  South.  It 
was  the  difference  between  a  general  ownership  of  land 
and  a  small  property-holding  class.  This  class,  as  might 
be  expected,  was  not  in  favor  of  land  bearing  the  tax 
burdens,  and  other  measures  were  sought.  The  poll  tax 
received  early  consideration  and  was  extensively  used.  A 
uniform  levy  was  at  first  adopted,  but  the  injustice  soon 
became  so  glaring  that  the  kind  and  amount  of  property 
owned  was  considered  in  making  the  levy.  The  poll  tax 
was  also  considered  as  a  lien  against  property.  The  sys- 
tem was  so  unsatisfactory,  however,  that  indirect  taxes 
were  used  extensively.  These  took  the  form  of  export 
duties  as  well  as  import  duties. 

In  the  middle  group  of  colonies  trade  developed  almost 
at  the  beginning,  and  was  the  logical  source  of  obtaining 
revenue.  Consumption  duties  were  levied  as  well  as  im- 
port and  export  duties.  These  did  not  take  care  of  all 
the  needs,  and  resort  had  to  be  made  to  other  sources  of 
revenue.  Under  the  Dutch  rule  of  Peter  Stuyvesant  in 
New  York,  for  example,  an  " honest  and  fair  tax"  was 
placed  upon  "land,  houses,  or  lots,  and  milch  cows  or 
draft  oxen."  Property  taxes  gradually  increased  in  im- 
portance in  this  group  of  colonies,  and  at  the  time  of  the 
Revolution  they  were  firmly  embedded  as  a  fundamental 
part  of  the  fiscal  system  of  all  the  colonies.  These  taxes 
centered  around  land,  and  the  importance  of  its  ownership 
was  intensified  in  some  colonies  by  making  the  full  rights 
of  citizenship  dependent  upon  the  possession  of  a  certain 
quantity  of  land. 

88.  The  Central  Government  Encountered  Difficulties 
in  Financing  the  Revolution. — The  difficulties  encountered 


150  OUTLINES  OF  PUBLIC  FINANCE 

by  the  central  government  in  securing  funds  to  carry  on 
the  Revolutionary  War  warranted  some  express  provi- 
sions in  the  Federal  Constitution  in  regard  to  revenues. 
The  underlying  difficulty  was  that  the  Continental  Con- 
gress had  no  compelling  power,  neither  had  it  any  inde- 
pendent source  of  revenue.  Its  sole  course  was  to  make 
requisitions  upon  the  colonies,  but  it  could  not  enforce 
payment.  The  Colonial  revenue  systems  were  simple, 
and  had  never  been  strained  by  heavy  demands,  since 
the  governmental  functions  were  comparatively  few  and 
inexpensive.  To  expect  them  to  respond  to  such  a  need 
as  a  national  war  would  have  been  to  expect  entirely  too 
much.  Indeed,  the  results  were  even  better  than  such  a 
loose  arrangement  might  warrant,  for  more  than  50  per 
cent  of  the  paper  money  requisitions  were  paid,  and  about 
15  per  cent  of  the  specie  demands. 

The  fiscal  provisions  in^the  Articles  of  Confederation 
illustrate  the  lack  of  power  of  the  central  government. 
No  state  was  expected  to  levy  duties  that  would  interfere 
with  any  treaties  into  which  Congress  might  enter.  All 
the  general  expenses  were  to  be  met  from  a  common  fund, 
which  was  to  be  supplied  by  the  various  states  in  propor- 
tion to  the  value  of  land  and  improvements.  The  levies 
and  collections  were  to  be  made  by  state  authorities. 

The  lack  of  any  power  to  enforce  these  provisions  re- 
sulted in  a  dearth  of  funds.  An  attempt  was  made  in  1781 
to  get  the  consent  of  the  states  to  a  rather  general  5  per 
cent  tax  on  imports.  In  spite  of  many  protests  and  much 
coercion,  Rhode  Island  remained  firm  against  the  meas- 
ure and  its  adoption  failed.  Two  years  later  an  attempt 
was  made  to  secure  import  duties  on  certain  specific 
articles,  the  collection  to  be  made  by  state  officials.  Less 
interest  was  shown  in  this  than  in  the  previous  proposi- 
tion, and  the  continued  opposition  of  New  York  kept  the 
proposal  from  becoming  active. 

89.  The  Federal  Constitution  Contains  Important  Fis- 
£aj  Provisions, — Fiscal  problems,  as  might  be  expected, 


REVENUE  SYSTEMS  OF  IMPORTANT  COUNTRIES  151 

received  no  little  attention  in  the  Constitutional  Conven- 
tion. The  measures  in  the  Constitution  to  safeguard  the 
revenues  of  the  Federal  government  are  as  follows: 

Congress  shall  have  power  to  lay  and  collect  taxes,  duties,  imposts, 
and  excises,  to  pay  the  debts  and  provide  for  the  common  defense 
and  general  welfare  of  the  United  States;  but  all  duties,  imposts,  and 
excises  shall  be  unif  jrm  throughout  the  United  States. 

No  capitation,  or  other  direct  tax,  shall  be  laid,  unless  in  proportion 
to  the  census  or  enumeration  hereinbefore  directed  to  be  taken. 

No  tax  or  duty  shall  be  laid  on  articles  exported  from  any  state. 

No  state  shall,  without  the  consent  of  Congress,  lay  any  imposts  or 
duties  on  imports  or  exports,  except  what  may  be  absolutely  neces- 
sary for  executing  the  inspection  laws;  and  the  net  produce  of  all 
duties  and  imposts,  laid  by  any  state  on  imports  or  exports,  shall  be 
for  the  use  of  the  treasury  of  the  United  States;  and  all  such  laws 
shall  be  subject  to  the  revision  and  control  of  the  Congress. 

All  bills  for  raising  revenue  shall  originate  in  the  House  of  Repre- 
sentatives; but  the  Senate  may  propose  or  concur  with  amendments, 
as  on  other  bills. 

The  importance  of  providing  for  uniform  duties  is  clear. 
Had  it  been  otherwise,  disgraceful  state  and  sectional  fili- 
bustering and  log  rolling  to  secure  local  advantages  would 
have  been  augmented  by  attempts  to  secure  favorable 
duties  for  a  particular  section.  Attempts  to  make  the  ex- 
pression " uniform"  apply  to  individuals  rather  than  to 
localities,  have  been  frustrated  by  the  courts. 

Direct  and  Indirect  Taxes. — The  apportionment  of  direct 
Federal  taxes  caused  much  difficulty  in  the  Constitutional 
Convention,  and  the  solution,  from  the  standpoint  of  jus- 
tice, leaves  much  to  be  desired.  The  previous  apportion- 
ment with  land  values  as  a  base  had  been  a  failure,  because 
no  adequate  assessment  had  been  made.  The  apportion- 
ment, according  to  numbers,  is  no  less  objectionable. 
With  such  an  unequal  distribution  of  taxpaying  ability 
as  exists  among  individuals  in  the  United  States,  appor- 
tionment on  this  basis  cannot  but  work  injustice.  The 
greatest  virtue  of  the  provision  is  that  it  seldom  has  been 
used.  Even  when  it  has  been  tried  the  success  has  not 


152  OUTLINES  OF  PUBLIC  FINANCE 

been  all  that  could  be  desired.  The  revenues  have  come 
in  slowly  and  in  uncertain  amounts.  The  first  attempt  to 
use  it  was  in  1798,  when  $2,000,000  was  apportioned 
among  the  states.  It  was  still  being  paid  five  years  later. 
Direct  taxes  were  again  used  as  an  emergency  measure 
at  the  tune  of  the  War  of  1812,  and  also  at  the  time  of  the 
Civil  War.  The  states  were  tardy  in  paying  their  appor- 
tionment and  the  full  amount  never  was  received. 

Meaning  of  Direct  Taxes. — The  meaning  of  direct  taxes 
has  not  always  been  clear,  and  has  led  to  considerable 
litigation.  The  court  has  usually  decided  the  particular 
case  before  it,  without  giving  a  general  interpretation.  In 
its  decisions  it  has  not  always  been  consistent,  neither  has 
it  followed  the  distinctions  which  have  usually  been  laid 
down.  The  income  tax  of  the  Civil  War  was  held  to  be 
constitutional,  while  a  similar  tax  in  the  early  'nineties  was 
declared  to  be  unconstitutional  on  the  ground  that  it  was 
a  direct  tax  not  levied  in  accordance  with  population. 
Soon  after  the  adoption  of  the  Constitution,  an  attempt 
was  made  to  secure  Federal  revenues  by  levying  a  tax  on 
carriages  and  on  the  sale  of  certain  commodities.  The 
carriage  tax  varied  according  to  the  kind  of  carriage  and 
was  contested  on  the  ground  that  it  was  a  direct  tax.  The 
ordinary  distinctions  between  direct  and  indirect  taxes 
would  place  such  a  tax  in  the  former  class,  yet  the  court 
did  not  so  rule.  It  held  that  a  tax  on  expense  was  to  be 
considered  as  an  indirect  tax.  Carriages  were  consumable 
commodities,  therefore  an  expense  to  the  owner,  and  a 
tax  would  be  an  indirect  one.  The  court  was  inclined  to 
believe,  it  is  said,  that  the  direct  taxes  intended  by  the 
Constitution  were  a  poll  tax  and  a  tax  on  land. 

Restriction  upon  Export  Duties. — The  singular  provision 
that  prohibits  the  levy  of  taxes  on  exports  was  due  to  the 
efforts  of  the  Southern  coast  states.  Many  leaders  of  the 
convention  urged  the  necessity  of  granting  Congress  power 
to  levy  export  duties.  The  delegates  of  these  Southern 
states  feared  such  a  power  might  be  used  to  discriminate 


REVENUE  SYSTEMS  OF  IMPORTANT  COUNTRIES  153 

against  their  agricultural  exports.  For  fear  of  losing  the 
support  of  the  South,  therefore,  the  concession  was 
granted. 

The  taxes  used  by  the  Federal  government,  then,  are 
principally  of  the  indirect  nature.  They  consist  of  two 
kinds — duties  upon  imported  goods,  and  internal  revenue 
duties.  The  protective  feature  of  the  import  duties,  how- 
ever, has  often  surpassed  the  revenue  aspects  in  impor- 
tance. The  use  of  the  Federal  income  tax,  which  was 
authorized  by  the  Sixteenth  Amendment  to  the  Consti- 
tution, has  been  an  important  recent  source  of  revenue. 
A  tax  upon  the  net  income  of  corporations  and  a  Federal 
inheritance  tax  have  also  been  used  to  a  small  extent. 

90.  Numerous  Taxes  Make  Up  the  Revenues  of  the 
States. — The  fiscal  systems  of  the  states  are  separate  and 
distinct  from  that  of  the  Federal  government.  The  Fed- 
eral government  is  one  of  delegated  powers,  while  the 
powers  of  the  states  are  residual.  Much  diversity,  there- 
fore, might  be  expected  in  the  fiscal  systems  of  the  states, 
while  the  Federal  system  can  only  be  changed  by  constitu- 
tional amendment  or  a  change  in  court  interpretations. 

Constitutional  Limitations. — The  constitutional  provi- 
sions noted  above  have  an  appreciable  effect  upon  the 
revenue  systems  which  can  be  used  by  the  states.  No 
state,  of  course,  can  levy  duties  upon  exports  or  imports. 
The  significance  of  this  restriction  has  increased  in  im- 
portance as  commerce  has  become  more  extensive,  and 
has  opened  up  greater  and  greater  possibilities  of  securing 
revenue.  The  constitutional  provisions  which  guarantee 
the  citizens  of  one  state  all  the  privileges  and  immunities 
of  the  citizens  of  another  state,  and  which  give  the  con- 
trol over  interstate  commerce  to  the  Federal  government, 
place  further  limitations  upon  the  state's  taxing  power. 
No  state  can,  therefore,  lay  a  tax  upon  a  citizen  of  another 
state  which  does  not  apply  likewise  to  its  own  citizens. 
The  courts  have  excepted  corporations  from  this  inter- 
pretation of  citizenship.  A  corporation  which  does  busi- 


154  OUTLINES  OF  PUBLIC  FINANCE 

ness  in  a  state  other  than  the  one  in  which  it  was  char- 
tered may  be  taxed  differently  from  corporations  formed 
within  the  state.  Should  a  state  attempt  to  levy  a  tax 
upon  goods,  either  leaving  its  borders  or  coming  in,  this 
action  would  immediately  be  declared  void  by  Federal 
authorities  because  of  the  interference  with  interstate 
commerce.  Consequently,  what  might  be  made  a  very 
fruitful  source  of  revenue  cannot  be  used,  and  resort  must 
be  had  to  forms  of  taxation  which  will  stand  under  the 
constitutional  provisions. 

State  Taxes. — Some  form  of  property  tax  was  early 
found  in  all  the  states,  and  has  so  developed  as  to  include 
practically  every  form  of  property,  both  personal  and 
real.  In  spite  of  the  difficulties  which  have  arisen,  it  still 
remains  the  tax  of  primary  importance  in  every  state,  if 
not  for  state  purposes,  for  the  minor  political  divisions. 
Problems  of  equal  assessment  arose  at  the  beginning  of 
its  use,  but  have  increased  many  fold  with  the  develop- 
ment of  immense  wealth  in  the  form  of  intangibles,  which 
so  easily  escape  assessment.  Many  innovations  and  modi- 
fications have  been  tried  to  remedy  the  defects,  but  with 
far  from  satisfactory  results.  The  long  use  of  the  property 
tax  has  so  firmly  embedded  it  in  state  and  local  tax  sys- 
tems that  attempts  to  dislodge  it,  or  even  materially 
modify  it,  have  generally  proved  futile. 

The  property  tax  still  retains  much  of  its  earlier  im- 
portance, yet  other  taxes  are  used  in  most  states  to  sup- 
plement it,  and  in  some  cases  almost  to  supplant  it  for 
securing  funds  for  state  purposes.  Where  this  is  true,  the 
property  tax  is  given  over  more  exclusively  to  the  local 
political  units.  One  of  the  first  taxes  to  be  used,  and  one 
which  possesses  great  possibilities  which  have  not  been 
developed,  is  the  inheritance  tax.  It  is  only  recently  that 
its  adoption  has  become  important,  and  as  yet  the  rates 
are  comparatively  low.  A  few  states  have  developed  the 
use  of  the  income  tax,  and  its  further  extension  as  a  source 
of  state  revenue  may  be  hastened  by  the  adoption  of  the 


REVENUE  SYSTEMS  OF  IMPORTANT  COUNTRIES  155 

Federal  income  tax.  The  policy  of  most  states  of  impos- 
ing taxes  of  various  sorts  upon  corporations  is  one  of 
increasing  importance.  Early  corporations  were  looked 
upon  in  a  measure  as  public  benefactors,  and  consequently 
were  treated  with  leniency.  As  this  attitude  changed, 
and  as  it  began  to  appear  that  corporations  were  well  able 
to  contribute  to  the  support  of  the  state  in  a  way  which 
they  were  not  doing  under  the  property  tax,  states  began 
to  impose  special  taxes  upon  them.  License  and  business 
taxes,  in  recent  years,  are  finding  a  more  important  place 
in  the  fiscal  systems  of  states. 

Local  tax  systems  are  largely  governed  by  the  states, 
and  invariably  hinge  around  property  taxes.  License 
and  business  taxes,  as  well  as  special  assessments,  are  also 
used.  The  principal  taxes  used  by  the  Federal,  state,  and 
local  governments  will  be  treated  in  detail  in  some  of  the 
succeeding  chapters. 

91.  Definite  Tendencies  Are  Indicated  by  Fiscal  Sys- 
tems.— In  this  review  of  the  development  of  tax  systems 
of  different  countries  certain  definite  tendencies  may  be 
noticed.  The  most  important,  perhaps,  is  that,  as  the 
central  governments  become  older,  and  the  political  duties 
and  responsibilities  become  recognized  by  the  citizens, 
direct  taxes  can  be  used  to  supply  an  increasing  propor- 
tion of  the  needs.  This  is  evidenced  by  the  importance  of 
the  income  tax  in  the  fiscal  systems  of  England  and  Prus- 
sia, and  its  recent  adoption  in  the  United  States. 

Another  noticeable  tendency  is  to  place  less  reliance 
upon  property  as  a  base  for  taxes.  The  European  coun- 
tries have  given  it  up  in  large  measure,  while  in  the  Ameri- 
can states  other  taxes  are  being  used  to  supplement  it, 
and  in  a  few  cases  the  revenue  from  property  is  left  almost 
entirely  for  the  use  of  localities.  The  tendency  has  de- 
veloped, also,  to  formulate  revenue  systems,  based  upon 
ability  to  pay  taxes.  The  gradual  replacing  or  supple- 
menting of  indirect  taxes  by  those,  the  burden  of  which 
can  more  easily  be  traced,  and  the  seizing  upon  new  forms 


156  OUTLINES  OF  PUBLIC  FINANCE 

of  ability  as  they  make  their  appearance,  are  evidences  of 
this  condition. 

No  generalization  can  be  made  as  to  tendencies  toward 
centralized  control  of  fiscal  systems.  In  some  European 
countries  such  control  is  practically  absent,  while  in  others 
it  is  important.  In  the  United  States,  aside  from  consti- 
tutional limitations,  the  Federal  government  exercises  no 
control  over  the  states.  The  states,  however,  usually 
have  complete  control  over  the  minor  political  divisions. 
There  has  been  a  recent  movement  in  some  parts  of  the 
country  to  secure  local  option  in  fiscal  matters,  but  as  yet 
it  has  met  with  little  success.  Another  very  marked 
tendency  in  every  political  division  is  the  resort  to  the  use 
of  public  credit.  A  subsequent  chapter  will  be  devoted  to 
this  aspect  of  revenues. 

ADDITIONAL  READING 

Seligman,  Essays  in  Taxation,  chap.  xvi. 


CHAPTER  VIII 

THE   SHIFTING   AND   INCIDENCE   OF   TAXES 

92.  The  Justice  of  a  Tax  May  Depend  on  Its  Shifting 
and  Incidence. — A  proper  understanding  of  the  terms 
shifting  and  incidence  is  necessary  before  their  discussion 
can  profitably  be  undertaken.  Fiscal  authorities  may 
place  a  tax  upon  a  particular  individual,  which  he  will 
pay.  He  may,  however,  in  some  way,  transfer  the  bur- 
den of  this  tax  to  a  second  individual;  the  second  may 
transfer  it  to  a  third,  and  so  on.  The  burden  must,  how- 
ever, finally  rest  somewhere — that  is,  a  point  will  be 
reached  where  there  will  be  opportunity  or  possibility  for 
no  more  transfers.  This  process  of  transferring  a  tax 
burden  from  one  individual  to  another  is  called  shifting] 
the  point  where  the  burden  finally  rests  is  called  the  inci- 
dence. The  expressions  have  the  same  meaning  as  when 
applied  by  physicists  to  rays  of  light.  A  ray  of  light  may 
be  shifted  or  refracted  in  various  directions  by  mirrors  or 
prisms,  but  it  will  finally  rest  or  hit  upon  some  point,  and 
this  point  is  its  incidence.  The  incidence  of  a  tax  is 
usually  considered  as  the  result  of  its  having  been  shifted. 
If,  however,  a  tax  burden  remained  where  it  was  first 
placed,  the  incidence  properly  might  be  said  to  be  here, 
even  though  no  process  of  shifting  occurred. 

The  shifting  of  a  tax  must  be  clearly  distinguished  from 
the  evasion  of  a  tax.  When  an  individual  evades  a  tax 
he  neither  pays  it  and  bears  the  burden,  nor  does  anyone 
else.  If  all  taxes  were  evaded  no  revenue  would  accrue 
to  the  state,  while  if  all  were  shifted  the  revenue  would  not 
be  affected,  yet  the  person  making  the  payment  would 


158  OUTLINES  OF  PUBLIC  FINANCE 

not  feel  the  burden.  When  the  holder  of  a  mortgage,  for 
example,  does  not  list  it  with  the  tax  assessor,  he  evades 
the  tax.  If,  however,  he  lists  the  mortgage  as  a  part  of 
his  property,  pays  the  tax  levied  upon  it,  and  then  charges 
the  mortgagor  a  sufficiently  high  rate  of  interest  to  recoup 
himself  for  the  tax,  it  is  shifted,  and  the  incidence  is  on 
the  mortgagor. 

Justice  in  taxation  has  long  been  an  important  fiscal 
problem,  and  from  the  time  authorities  began  to  give  it 
their  attention  the  question  of  shifting  and  incidence  has 
received  careful  consideration.  Some  of  the  early  theories 
of  taxes  find  their  justification  in  the  ideas  which  were 
held  concerning  this  particular  phase.  The  ideas  were 
sometimes  unsound,  and  the  tax  systems  were  modified 
as  experience  showed  the  fallacies  around  which  they 
were  built.  Some  attention  has  been  given  to  the  shifting 
and  incidence  of  revenues  from  the  beginning  of  fiscal 
operations,  yet  it  is  only  recently  that  any  scientific  study 
has  been  made  as  to  causes,  results,  and  methods.  It  is 
at  present  one  of  the  most  important  questions — if,  in- 
deed, not  the  most  important — to  be  considered  in  deter- 
mining the  justice  of  taxes.  It  is  only  when  knowledge  is 
had  of  the  real  bearer  of  a  tax  burden,  that  correct  judg- 
ment can  be  passed  as  to  the  real  justice  of  that  tax. 

To  know  merely  that  a  tax  has  been  shifted  is  often 
insufficient  knowledge  to  a  reader  or  an  investigator.  It 
is  not  known  how  far  the  incidence  is  removed  from  the 
levy  of  the  tax,  whether  the  tax  has  been  shifted  once, 
twice,  or  a  half  dozen  times.  Neither  is  it  known  whether 
the  shifting  has  been  backward  toward  the  producer,  or 
forward  toward  the  consumer,  yet  a  tax  might  be  shifted 
in  either  direction,  depending  on  circumstances  which 
will  be  discussed  later.  Where  there  has  been  more  than 
one  stage  in  the  shifting  process,  a  student  often  wants  to 
notice  the  consequences  of  the  tax,  or  the  mode  of  shifting 
at  one  or  more  of  these  stages.  The  expressions,  original 
incidence,  or  first  incidence,  second  incidence,  and  so  on? 


THE  SHIFTING  AND  INCIDENCE  OF  TAXES     159 

are  sometimes  used  to  denote  the  different  stages  in  the 
shifting  process.  When  used  without  a  qualifying  word, 
however,  incidence  refers  to  the  final  resting  place  of 
a  tax. 

A  fiscal  system  which  attempted  to  levy  taxes  only 
upon  the  individuals  most  able  to  bear  tax  burdens,  might 
be  very  unjust  in  its  operation  because  of  the  shifting  of 
these  burdens.  The  attempt  should  be  made  to  levy 
taxes  so  that  the  incidence  will  occur  where  there  is  the 
greatest  ability  to  bear  the  burden.  Such  an  ideal,  of 
course,  would  be  difficult  to  attain,  but  it  can  be  more 
nearly  attained  if  fiscal  authorities  understand  and  apply 
the  principles  that  govern  the  shifting  and  incidence  of 
taxes. 

93.  A  Study  of  Shifting  and  Incidence  Is  Fundamen- 
tally a  Study  of  Price. — It  would  be  utterly  impossible  to 
trace  the  burden  of  every  tax  until  the  incidence  were 
definitely  determined.  In  fact,  it  would  be  impossible  to 
trace  definitely,  through  all  its  ramifications  of  direct  and 
indirect  influences,  the  shifting  of  any  tax  burden,  though 
it  could  be  much  more  nearly  done  in  some  cases  than  in 
others.  Some  taxes  are  not  shifted  at  all,  others  to  a  very 
small  extent,  while  the  burden  of  some  is  lost  in  the  great 
mass  of  a  consuming  population  where  it  is  impossible, 
sometimes,  even  to  locate  or  estimate  the  burden. 

The  Diffusion  Theory. — The  difficulty  of  tracing  a  tax, 
however,  need  not  discourage  a  study  of  the  principles 
which  underlie  the  conditions  which  make  shifting  possi- 
ble. An  early  group  of  theorists  held  that  every  tax  was 
shifted  on  and  on,  ad  infinitum,  until  the  burden  rested 
upon  every  individual.  This  is  known  as  the  diffusion 
theory,  and  was  supported  because  it  was  believed  that 
taxes  were  so  diffused  that  the  amount  which  fell  upon 
any  individual  was  so  small  as  to  be  practically  burden- 
less.  A  moment's  reflection,  however,  will  reveal  the  fal- 
lacy of  such  reasoning. 

Suppose  an  individual  buys  a  s.uit  of  clothes  for  his  own 


160  OUTLINES  OF  PUBLIC  FINANCE 

consumption,  for  which  he  pays  $50.  There  is  a  10  per 
cent  tax  on  the  excess  paid  over  $25,  or  a  tax  of  $2.50. 
Since  he  does  not  pass  the  clothes  on  to  some  one  else,  and 
thereby  provide  the  possibility  of  raising  the  price  to 
$52.50,  in  order  to  recoup  himself,  he  must  bear  the  bur- 
den. Numerous  taxes,  such  as  the  one  suggested,  are 
familiar  to  those  who  bought  goods  during  and  after  the 
Great  War.  If,  in  the  supposed  case,  however,  the  tax 
had  been  placed  on  the  manufacturer,  and  he  had  raised 
the  price  $2.50  to  the  wholesaler,  who  likewise  raised  it 
$2.50  to  the  retailer,  the  consumer  must  pay  $2.50  in 
order  to  recoup  the  retailer.  The  incidence  in  this  case 
is  the  same  as  in  the  first  supposition,  although  there  have 
been  a  number  of  shiftings.  But  the  consumer  cannot 
shift  the  tax  farther.  The  suit  of  clothes  is  now  past  the 
final  stage  of  production,  and  has  ceased  to  influence  the 
producer-consumer  relationship.  It  no  longer  can  enter 
into  demand  and  supply  as  it  did  when  in  the  hands  of 
the  retailer,  wholesaler,  or  manufacturer. 

Demand,  Supply,  Price. — From  this  example  it  is  seen 
that  a  tax  on  a  good  cannot  be  shifted  by  the  consumer  if 
it  is  levied  after  the  last  stage  of  the  productive  process. 
In  other  words,  there  must  be  a  chance  to  affect  an  in- 
crease in  price  to  some  one  else  in  order  to  regain  the  tax. 
It  is  a  truism  to  economic  students  that  the  two  most 
active  determinants  of  price  are  supply  and  demand.  In 
order  to  influence  price,  then,  the  individual  who  wishes 
to  shift  a  tax  must  do  it  through  influencing  one  of  these 
factors.  The  case  would  be  rare  where  a  good  would  be 
more  in  demand  after  a  tax  had  been  placed  on  it  than 
before,  for  it  is  difficult  to  see  how  the  circumstance  of  a 
tax  would  increase  the  utility.  It  might  be  true  in  cases 
where  the  use  of  taxed  goods  gave  some  mark  of  distinc- 
tion, and  therefore  made  them  desirable,  but  such  cases 
would  be  so  rare  as  to  need  no  consideration. 

Ordinarily,  then,  the  price  change  must  be  effected 
through  a  change  in  the  supply.  A  decrease  in  the  supply, 


THE  SHIFTING  AND  INCIDENCE  OF  TAXES     161 

with  a  constant  demand,  will  raise  the  marginal  utility, 
hence  increase  the  price  and  allow  the  tax  to  be  shifted. 
From  this  brief  review  of  the  nature  of  price  it  is  easily 
seen  that  a  study  of  tax  shifting  is  fundamentally  a  study 
of  the  laws  of  price.  With  this  in  mind  it  will  be  interest- 
ing to  note  the  possibility  of  shifting  some  of  the  more 
common  taxes. 

94.  General  Poll  and  Income  Taxes  Cannot  Be  Shifted. 
—The  conditions  just  considered,  which  make  the  shifting 
of  taxes  possible,  are  scarcely  applicable  to  some  taxes, 
while  they  are  easily  applied  in  the  case  of  others.  Gen- 
eral poll  and  income  taxes  furnish  good  examples  of  those 
which  cannot  be  shifted,  because  of  the  applicability  of 
the  laws  of  price. 

General  Poll  Tax. — Poll  and  income  taxes  are  more 
closely  connected  with  personality  than  are  any  other 
forms  of  taxation.  There  is  no  possibility  of  a  general 
poll  tax  changing  the  price  of  something  used  by  some 
one  else,  so  as  to  make  him  bear  the  burden.  The  burden 
of  a  general  poll  tax  of  $10  upon  every  person  over  twenty- 
one  years  old  would  fall  on  the  individuals  of  that  class. 
It  may  be  necessary  to  expend  more  energy  in  order  to 
get  funds  to  meet  the  tax,  or  the  tax  may  be  evaded,  as 
is  the  case  of  many  of  the  poll  taxes  in  the  Southern  states, 
but  this  does  not  shift  the  burden. 

It  is  conceivable,  however,  that  a  general  poll  tax  could 
be  made  so  burdensome  as  to  postpone  the  age  of  marriage 
and  materially  reduce  the  size  of  families.  The  long-time 
effect,  therefore,  might  be  to  lessen  the  supply  of  labor 
relative  to  the  demand,  and  cause  a  shifting  of  the  tax  to 
the  extent  that  a  decrease  in  numbers,  due  to  the  tax, 
caused  a  higher  wage.  In  this  case  a  greater  burden 
would  be  placed  upon  employers  because  of  the  tax. 

Local  Poll  Tax. — The  immediate  effect  of  a  poll  tax 
levied  by  a  particular  community  differs  materially  from 
a  general  poll  tax  in  its  possibility  of  being  shifted.  Sup- 
pose one  county  in  western  Pennsylvania  would  levy  an 


162  OUTLINES  OF  PUBLIC  FINANCE 

annual  poll  tax  of  $100  upon  every  male  person  over 
twenty-one  years  old,  while  the  adjoining  counties  had  no 
such  tax.  Laborers  would  leave  the  county  with  the  tax 
to  seek  employment  where  the  tax  system  was  less  bur- 
densome. This  decrease  in  labor  would  mean  an  increase 
in  wage  to  those  who  remained.  The  tax  will  have  been 
shifted  to  the  employer  to  the  extent  of  the  wage  increase. 

Income  Taxes. — The  possibility  of  shifting  income  taxes 
follows  practically  the  same  reasoning  as  for  poll  taxes. 
A  general,  proportional  income  tax  would  hardly  be 
shifted.  An  individual  would  not  cease  to  get  an  income 
because  it  were  taxed,  neither  would  he  gain  by  going  to 
another  locality  or  occupation  where  the  tax  conditions 
were  the  same.  If  the  tax  were  large  enough  to  be  burden- 
some it  might,  over  a  period  of  tune,  have  the  same  effect 
as  a  burdensome  poll  tax  in  reducing  numbers.  This  re- 
duction in  the  size  of  the  family  in  order  to  maintain  a 
certain  standard  of  living,  will  result  in  higher  wages  than 
would  otherwise  exist.  The  price  of  labor  has  gone  up 
because  of  a  tax,  and  the  tax  has  been  shifted  to  the  ex- 
tent of  the  wage  increase. 

Where  rates  vary  for  different  communities  there  is 
likely  to  be  a  readjustment  of  the  labor  supply,  with  a 
shifting  of  the  tax  to  the  extent  of  increased  wages  due 
to  the  readjustment.  Shifting  might  also  take  place  if 
incomes  from  one  occupation  were  taxed  more  heavily 
than  incomes  from  another.  Suppose  that,  under  the 
police  power,  the  income  of  teachers  should  be  made  ex- 
empt from  taxes  while  no  exemption  were  made  for  book- 
keepers and  stenographers.  This  would  make  teaching 
more  desirable  and  the  other  occupations  less  desirable. 
The  number  of  bookkeepers  and  stenographers  would 
decrease,  with  a  corresponding  higher  wage  to  those  re- 
maining. In  so  far  as  this  would  be  true,  the  tax  would  be 
shifted  to  the  extent  of  the  increased  wage.  These  cases 
are  mere  possibilities,  and  as  a  general  proposition  neither 
general  poll  nor  income  taxes  can  be  shifted. 


THE  SHIFTING  AND  INCIDENCE  OF  TAXES     103 

95.  Land  Taxes  Are  Often  Called  Burdenless  Taxes.— 

It  is  a  generally  accepted  principle  that  a  tax  on  land 
values  is  capitalized,  and  that  sufficient  allowance  is  made 
in  the  purchase  price  that  the  burden  of  the  tax  continues 
to  remain  on  the  individual  who  owned  the  land  when  the 
tax  was  levied.  An  example  will  make  clear  how  this 
principle  is  supposed  to  work.  A  man  contemplates  buy- 
ing a  farm,  and  calculates  that  the  net  income  from  its 
operation  would  be  about  $2,200,  which,  capitalized  at  the 
current  rate  of  return  on  similar  investments,  say  5  per 
cent,  would  make  the  value  of  the  farm  $44,000.  In  these 
figures,  however,  he  has  neglected  to  take  into  account 
the  annual  tax  of  $200.  When  this  is  considered  the 
annual  net  income  is  reduced  to  $2,000,  which,  capitalized, 
will  give  a  valuation  of  $40,000  that  the  purchaser  will  be 
willing  to  pay.  He  keeps  the  additional  $4,000  that  he 
would  have  been  willing  to  pay  for  the  farm  had  there 
been  no  tax,  to  endow  permanently  the  annual  tax  of 
$200.  The  seller,  by  being  compelled  to  accept  $40,000 
instead  of  $44,000,  has  borne  the  burden  of  the  $200  tax 
as  long  as  it  exists. 

It  is  possible  that  the  supposed  purchaser  of  land  may 
want  to  sell  his  purchase.  He  does  not  feel  the  effect  of 
the  tax  as  did  the  original  seller.  The  income,  less  the 
tax,  will  still  be  the  same,  and  the  selling  price  will  be  the 
same  as  the  purchase  price  so  far  as  the  tax  is  concerned. 
The  tax  has  been  paid  year  after  year,  yet  the  owner  of 
the  land  has  felt  no  burden  of  it.  It  is  often  asserted, 
therefore,  that  the  burden  of  a  tax  remains  upon  the 
owner  of  the  land  at  the  time  of  the  levy,  and  is  burden- 
less  upon  all  future  purchasers.  In  other  words,  a  tax  on 
land  values  cannot  be  shifted  to  the  purchaser. 

Tax  on  Land  Values. — It  is  generally  believed  that  an 
increase  in  taxes  on  land  values  is  often  shifted  by  the 
landlord  to  the  tenant  through  collecting  a  higher  rent. 
A  correct  understanding  of  the  nature  of  rents  will  reveal 
the  fallacy  of  such  thinking.  Students  of  economics  are 


164  OUTLINES  OF  PUBLIC  FINANCE 

familiar  with  the  differential  nature  of  rents.  They  repre- 
sent a  surplus  which  belongs  to  the  owners  of  the  better 
grades  of  land.  Rent  represents  the  difference  between 
the  return  from  these  better  grades  of  land  and  the  return 
from  that  grade  of  land  which  it  just  pays  to  cultivate  at 
the  prevailing  prices  for  the  products  from  the  land. 
This  marginal  grade  of  land  has  no  rental,  hence  no  capi- 
tal value  to  be  affected  by  a  tax.  Before  a  tax  would 
lessen  the  amount  of  land  under  cultivation  it  would  have 
to  be  100  per  cent  of  this  rental  surplus.  A  tax  upon 
values,  then,  would  have  no  effect  upon  the  amount  of 
land  used  for  cultivation.  The  tax,  on  the  other  hand,  in 
no  way  affects  the  demand  for  the  products  from  the  land, 
hence  prices  and  the  differential  advantage,  in  rent,  will 
remain  the  same  as  without  a  tax.  Land  is  no  more  or 
less  desirable  to  a  tenant  after  a  tax  levy  than  before. 

It  may  appear,  sometimes,  that  the  landlord  shifts  the 
tax  in  a  higher  rent  charge.  If,  for  some  reason,  the  ten- 
ant has  not  been  paying  the  full  differential  surplus,  then 
it  may  be  possible  for  the  landlord  to  raise  the  rent  and 
think  he  is  shifting  the  tax.  What  he  does,  however,  is  to 
get  more  or  all  of  the  surplus  which  he  should  have  been 
getting  before  because  of  the  differential  advantage  of 
his  land.  The  landlord,  then,  must  bear  the  new  tax, 
which  makes  the  land  a  less  desirable  investment  than  it 
was  before  the  tax  was  levied.  Demand  will  fall  off  for 
this  class  of  property,  with  a  consequent  fall  in  the  price 
of  land  values.  Again  it  is  seen  that  the  burden  of  such 
a  tax  once  and  for  all  falls  upon  the  owner  of  the  land  at 
the  time  of  the  levy. 

Specific  Tax  on  Land. — A  specific  tax  on  land  would 
have  very  different  results.  Here  the  demand  and  supply 
relationship  would  be  changed,  which  would  result  in  price 
changes  through  which  the  shifting  of  the  tax  could  be 
accomplished.  Suppose  a  new  tax  of  $10  an  acre  to  be 
placed  on  agricultural  lands.  The  poorest  land  under 
cultivation,  however,  has  just  been  remunerating  capital 


THE  SHIFTING  AND  INCIDENCE  OF  TAXES     165 

and  labor  for  the  energy  expended  in  production.  Again 
the  imposition  of  the  tax  makes  the  products  no  more 
desirable,  and  capital  and  labor  cannot  afford  to  con- 
tinue to  use  this  land,  but  will  seek  other  fields  where 
it  will  be  properly  remunerated.  This  action  causes  a 
decrease  in  the  amount  of  products  put  on  the  market, 
with  a  corresponding  rise  in  price.  Through  this  price 
change  the  owners  of  lands  which  will  continue  to  be 
cultivated  will  partially  recoup  themselves  for  the  $10 
an  acre  tax. 

Tax  on  Nonreprodudble  Goods. — General  taxes  on  non- 
reproducible  goods  have  the  same  characteristics  as  taxes 
on  land.  They  are  capitalized  by  a  prospective  buyer 
and  the  purchase  price  is  so  modified  that  the  burden 
rests  on  the  owner  at  the  time  the  tax  was  levied.  A  tax 
upon  bonds  previously  exempt  would  be  offset  by  a  de- 
creased selling  price.  Suppose,  for  example,  there  were 
no  taxes  on  5  per  cent  bonds,  and  that  under  this  condi- 
tion the  bonds  were  selling  at  par.  The  government  now 
places  a  tax  of  1  per  cent  on  this  class  of  bonds,  which 
reduces  the  return  to  4  per  cent.  A  purchaser  will  con- 
sider only  such  a  figure  as  will  bring  him  5  per  cent  on  his 
investment — that  is,  he  will  be  willing  to  pay  no  more 
than  80  for  perpetual  bonds.  The  seller  must  take  a  20 
per  cent  discount  because  of  the  tax.  A  tax  on  such  non- 
reproducible  goods  as  pictures,  curios,  etc.,  would  have 
the  same  effect.  The  levy  of  a  tax  does  not  increase  the 
desire  for  the  goods,  the  purchase  price  will  be  decreased, 
and  the  burden  remain  on  the  seller.  If  the  tax  were  a 
local  one,  however,  rather  than  general,  it  might  be  evaded 
by  moving  the  goods.  Herein  lies  one  important  differ- 
ence between  such  goods  and  land. 

From  these  apparent  results  of  a  tax  on  land  and  other 
nonreproducible  goods,  it  appears  from  the  standpoint  of 
justice  that  such  taxes  should  be  permanent  rather  than 
temporary.  Not  all  property  changes  hands  within  a 
given  period.  A  temporary  tax  would  be  unjust  to  those 


166  OUTLINES  OF  PUBLIC  FINANCE 

transfers  which  were  made  while  the  tax  existed,  because 
the  burden  of  future  taxes  would  be  saddled  upon  the 
transferor,  while  in  a  preceding  or  succeeding  period  of  no 
tax  the  burden  would  be  entirely  different.  The  same 
principle  applies  to  the  taxation  of  inheritances.  An  in- 
heritance tax  should  be  permanent  so  the  burden  on  in- 
heritances made  at  different  times  will  not  be  different. 

96.  Taxes  on  Buildings  May  Be  Shifted. — Since  the  sup- 
ply of  buildings  is  not  constant,  but  may  be  materially 
changed  over  a  period  of  time,  a  tax  placed  upon  them  is 
somewhat  different,  as  regards  shifting,  from  a  tax  placed 
upon  land.  Because  of  the  relative  fixity  of  capital  in- 
vested in  buildings,  however,  the  total  or  partial  shifting 
of  the  tax  may  take  place  only  after  a  period  of  time.  It 
may  be  assumed  that  the  competition  of  the  different 
forms  of  investment  for  capital  will  have  worked  itself 
out  so  that  capital  invested  in  buildings  will  be  receiving 
the  normal  return.  Suppose  that  the  government  now 
levies  a  tax  upon  buildings  which  will  diminish  this  re- 
turn, and  that  the  owner  attempts  to  reimburse  himself 
by  exacting  a  higher  rental  from  the  tenant.  The  rent 
item  in  the  budget  of  the  tenant  is  already  as  large  as  he 
can  afford,  and  rather  than  meet  an  increase  he  will  move 
to  a  less  desirable  building.  Other  tenants  will  do  the  same 
until  some  previously  submarginal  buildings  may  be 
brought  into  use.  Here,  as  in  the  case  of  land,  the  product 
is  no  more  valuable  to  the  consumer  because  it  is  taxed, 
the  tenant  is  unwilling  to  pay  more  than  the  utility  repre- 
sented, and  the  landlord  must  bear  the  burden. 

Over  a  period  of  time  the  situation  is  likely  to  change. 
The  pressure  of  the  tax  makes  the  investment  of  capital 
in  buildings  less  profitable  than  before  the  tax  was  laid, 
and  less  profitable  than  other  forms  of  investment  which 
were  excluded  from  the  tax.  Capital  will  cease  to  flow 
into  this  field  and  the  supply  of  buildings  will  remain 
stationary.  As  population  increases,  however,  the  demand 
for  buildings  increases,  with  a  corresponding  rise  in 


THE  SHIFTING  AND  INCIDENCE  OF  TAXES     167 

rentals.  They  will  continue  to  rise  until  capital  invested 
in  buildings  again  will  be  getting  the  current  return, 
when  more  buildings  will  be  produced.  Rentals  have 
raised  because  the  tax  caused  the  supply  of  buildings  to 
remain  stationary,  while  there  was  a  continuous  increase 
in  demand.  Over  a  period  of  time,  then,  because  of  in- 
creased rentals  due  to  a  readjustment  of  the  supply  and 
demand,  the  tenant  will  bear  the  burden  of  a  tax  on 
buildings. 

In  purchasing  a  building  the  same  considerations  apply 
as  in  the  purchase  of  land  or  bonds.  If  the  payment  of  a 
tax  is  going  to  cause  the  receipt  of  less  than  the  current 
rate  on  the  investment,  the  tax,  or  a  part  of  it,  will  be 
capitalized  and  deducted  from  the  purchase  price.  To 
the  extent  that  this  is  done  the  burden  falls  upon  the 
seller. 

97.  The  Capitalization  Theory  Has  Been  Ably  Criti- 
cized.1— The  theory  that  taxes  on  land  and  other  non- 
reproducible  goods  continue  to  remain  a  burden  upon  the 
owner  of  the  property  at  the  time  of  the  tax  levy,  has  not 
gone  unchallenged.  A  brief  consideration  of  some  of  the 
criticisms  may  be  well  worth  while.  They  have  been  sug- 
gested, in  fact,  in  the  above  treatment  of  the  capitaliza- 
tion principle. 

An  individual  who  wishes  to  invest  capital  has  a  num- 
ber of  possibilities — industry,  buildings,  land,  bonds,  as 
well  as  other  fields.  Assuming  similar  degrees  of  risk, 
the  important  factor  which  will  govern  the  decision  is  the 
rate  of  return.  He  must,  however,  compare  the  rate  of 
return  to  be  received  from  the  taxed  land  with  that  from 
other  industries,  also  taxed.  If  all  other  forms  of  invest- 
ment of  the  same  degree  of  risk  as  land  were  so  taxed  that 
1  per  cent  of  the  net  income  be  taken,  which  would  leave 
a  realizable  return  of  5  per  cent,  then  the  purchaser  of 

1  For  an  able  criticism  of  this  principle,  see  an  article  by  T.  S.  Adams  in 
the  American  Economic  Review  for  June,  1916.  E,  R.  A.  Seligman  has  a 
reply  in  the  Peeember  issue  of  the  same  year. 


168  OUTLINES  OF  PUBLIC  FINANCE 

land  will  be  satisfied  with  a  5  per  cent  return  from  his 
land.  But  in  accepting  this  return  he  unconsciously  bears 
the  tax  burden  placed  upon  the  investments  with  which 
he  made  comparisons. 

If  the  landowner  were  bearing  no  tax  burden,  his  rate 
of  return  would  be  greater  than  that  received  from  taxed 
industries.  What  the  purchaser  of  land  would  capitalize 
and  refuse  to  include  as  a  part  of  the  purchase  price  would 
be  any  excess  in  land  taxes  over  the  taxes  on  other  forms 
of  investment.  He  expects  the  current  rate  of  return,  and 
will  not  be  willing  voluntarily  to  shoulder  a  tax  burden 
which  would  cause  his  return  to  be  less  than  this.  Invest- 
ments in  land,  after  all,  possess  no  special  privileges  or 
immunities.  It  may  seem  that  the  purchaser  is  only 
tacitly  paying  a  tax  whose  burden  has  already  been 
shouldered.  In  reality,  however,  he  is  silently  bear- 
ing the  tax  burden  in  that  he  has  accepted,  as  a  return 
on  his  investment,  the  current  return  from  other  taxed 
industries. 

Correction  of  Injustice. — If  a  tax  on  land  and  similar 
investments  becomes  burdenless,  then  a  rank  injustice  is 
being  perpetrated  by  allowing  such  a  condition  to  con- 
tinue to  exist.  A  particular  class  is  escaping  tax  burdens 
which  other  classes  are  called  upon  to  bear.  The  just 
solution  for  such  an  evil  would  be,  not  only  to  have  this 
class  pay  the  tax  which  is  no  burden,  but  to  place  an  addi- 
tional tax  upon  it  equal  to  the  burdens  felt  by  other 
classes.  That  is,  immediately  after  the  sale  of  a  piece  of 
land,  bonds,  or  other  similar  forms  of  property,  there 
should  be  a  new  or  additional  tax  placed  on  them.  But 
in  order  to  do  this  the  purchaser  would  somehow  have  to 
be  led  to  believe  that  it  was  not  going  to  be  done — other- 
wise he  will  capitalize  the  contemplated  tax,  not  only  the 
immediate  one,  but  all  future  ones,  and  the  logical  outcome 
would  be  the  destruction  of  values. 

Illustration  of  Bond  Sales. — An  illustration  will  make 
clear  the  effect  of  an  attempt  to  make  use  of  such  a  scheme 


THE  SHIFTING  AND  INCIDENCE  OF  TAXES    169 

as  that  just  outlined.  Suppose  a  purchaser  contemplates 
buying  bonds  on  which  the  annual  tax  is  1  per  cent.  Under 
the  capitalization  scheme  he  will  escape  this  burden  by 
paying  less  for  the  bonds  than  he  otherwise  would  have 
paid.  To  somewhat  equalize  tax  burdens,  then,  suppose 
an  additional  1  per  cent  tax  be  added.  On  a  resale 
this  would  also  be  capitalized,  and  the  purchase  price 
accordingly  reduced,  necessitating  another  increase  in 
the  tax  rate  to  equalize  burdens.  After  a  few  such 
sales  the  income  from  the  bonds  would  be  entirely  taken 
in  taxes. 

If  the  original  purchaser  knew  this  was  to  be  the  future 
policy  in  levying  taxes,  allowance  would  be  made  for  the 
capitalization  of  all  these  new  taxes  after  resales,  and  the 
price  he  would  be  willing  to  pay  would  be  materially  les- 
sened. It  could  be  only  through  some  form  of  deception 
— through  levying  some  form  of  tax  that  the  purchaser 
did  not  expect — that  he  could  be  made  to  bear  the  so- 
called  burden.  The  situation  wrould  be  more  literally  true 
with  land  than  with  bonds.  The  latter  might  be  pur- 
chased with  the  idea  of  holding  to  maturity,  while  the 
only  way  of  securing  capital  invested  in  land  is  by 
resale. 

Conclusion  as  to  Burdenless  Taxes. — Such  reasoning,  no 
doubt,  seriously  questions  the  commonly  accepted  "bur- 
denless  taxes"  which  are  supposed  to  arise  from  the  pur- 
chaser deducting  the  capitalized  tax  from  his  otherwise 
purchase  price.  The  important  thing  to  be  considered  in 
making  an  investment,  aside  from  risk,  is  the  rate  of  re- 
turn. A  tax  is  one  of  the  factors  which  will  affect  this. 
When  the  current  rate  of  interest  is  5  per  cent,  5  per  cent 
bonds  will  sell  at  par.  They  are,  however,  silently  bearing 
the  tax  placed  upon  other  investments,  because  it  is  the 
return  from  these  investments  with  which  the  bondholder 
is  satisfied.  If,  somehow,  all  taxes  should  be  removed 
from  these  other  investments,  the  returns  from  them 
would  immediately  go  to  6  or  7  per  cent.  The  immediate 


170  OUTLINES  OF  PUBLIC  FINANCE 

effect  of  this  on  the  bond  values  would  be  to  force  them 
below  par,  till  the  same  return  were  realized. 

By  using  the  current  rate  of  return,  then,  as  the  basis 
for  his  calculations,  an  investor  bears  the  ordinary  rate 
of  taxes  in  purchasing  land  and  similar  kinds  of  property. 
If,  however,  the  property  to  be  purchased  bore  taxes  in 
excess  of  the  ordinary  rate,  which  would  result  in  a  less 
than  normal  net  return,  this  excess  would  be  capitalized 
and  deducted,  in  order  that  the  return  be  the  same  as  for 
similar  forms  of  investment. 

98.  All  Taxes  on  Monopolies  Will  Not  Be  Shifted  to  the 
Consumer. — The  opinion  is  prevalent  among  the  unin- 
formed that  a  monopolist  has  absolute  control  in  fixing 
price — that  he  can  fix  it  at  any  place  he  chooses.  A  tax 
placed  upon  a  monopoly  or  upon  a  monopoly-produced 
good,  then,  is  believed  to  be  shifted  over  to  the  consumer 
by  the  monopolist  simply  adding  the  amount  of  the  tax  to 
the  price  of  the  product. 

A  monopolist,  however,  possesses  no  such  broad  powers. 
In  some  cases  a  tax  may  be  shifted,  or  partially  shifted, 
while  in  other  cases  no  attempt  would  be  made  to  shift 
the  tax  burden.  When  shifting  is  accomplished,  even  by 
a  monopoly,  the  same  laws  of  price  must  be  observed 
as  hi  any  other  case  of  shifting.  A  monopolist  can 
have  very  little,  if  any,  direct  control  over  demand.  A 
good  produced  by  a  monopoly  possesses  no  more  utility 
than  if  it  were  produced  under  competitive  conditions, 
and  it  will  bring  no  higher  price.  The  power  of  the 
monopolist  lies  in  his  ability  to  control  the  amount 
of  goods  which  will  be  placed  on  the  market,  and  this 
supply  in  conjunction  with  the  existing  demand  will 
determine  the  price.  The  attempt  will  ordinarily  be 
made  to  regulate  the  supply  so  as  to  receive  the  highest 
net  returns. 

Tax  on  Each  Unit  of  Goods.— The  probability  that  taxes 
placed  upon  a  monopoly  will  be  shifted  can  best  be  studied 
from  an  illustration.  Suppose  the  conditions  of  cost  and 


THE  SHIFTING  AND  INCIDENCE  OF  TAXES     171 


demand  for  a  good  produced  by  a  monopoly  to  correspond 
to  the  following  schedule : 


Number 
Produced 

Cost  of 

Each 

Selling  Price 
of  Each 

Monopoly 
Profit 

Profit  with  $2.00 
Tax  per  Unit 

25 

$5.00 

$20.00 

$375.00 

$325.00 

50 

4.50 

18.00 

675.00 

575.00 

75 

4.30 

15.50 

840.00 

690.00 

100 

4.15 

12.75 

860.00 

660.00 

125 

4.10 

10.00 

738.50 

488.50 

150 

4.05 

8.00 

593.50 

293.50 

175 

4.00 

4.00 

350.00  (loss) 

It  is  to  be  remembered  that  the  monopolist  has  control 
over  the  supply  schedule,  but  not  over  the  demand.  He 
will  presumably  fix  the  supply  at  the  place  where  he  will 
receive  the  highest  net  return,  which  in  the  schedule  will 
be  100  units  of  the  commodity.  At  this  number  the  net 
profit  is  $860 — more  than  if  any  other  number  were  put  on 
the  market.  Suppose,  now,  the  government  places  a  $2 
tax  upon  each  unit  of  the  good  produced.  The  monopoly 
profits,  after  paying  the  tax,  are  shown  in  the  last  column 
of  the  schedule.  The  greatest  monopoly  profit  will  now 
occur  when  75  units  of  the  good  are  produced  rather  than 
100.  The  imposition  of  the  tax  will  cause  a  curtailment 
of  supply  from  100  to  75,  with  a  corresponding  rise  in  price 
from  $12.75  to  $15.50  per  unit.  In  this  particular  instance 
the  price  has  risen  by  more  than  the  amount  of  the  tax, 
even  though  the  total  returns  to  the  monopoly  are  less 
than  before  the  levy  of  the  tax. 

With  a  different  tax  or  a  different  schedule  it  is  possible 
that  the  price  might  rise  because  of  a  tax,  but  by  an 
amount  less  than  the  tax.  A  tax  on  the  number  of  units 
produced,  moreover,  may  not  affect,  in  the  least,  the  sup- 
ply of  goods  offered.  It  is  easily  possible,  if  the  tax  be 
small,  that  the  point  of  highest  net  returns  will  be  at  the 
same  point  in  the  supply  schedule  as  before  the  tax  levy. 
In  such  a  case  the  tax  burden  is  borne  by  the  monopoly. 

Net  Returns  or  Lump  Sum  Tax, — Taxes  on  a  monopoly, 


172  OUTLINES  OF  PUBLIC  FINANCE 

instead  of  being  levied  on  each  unit  of  goods,  may  be 
levied  on  the  net  returns  or  in  a  lump  sum.  In  neither  of 
these  cases  would  there  be  any  attempt  to  shift  the  tax 
through  a  readjustment  of  the  supply  schedule.  In  the 
above  schedule  suppose  a  10  per  cent  tax  has  been  levied 
upon  the  net  returns.  The  highest  net  returns  will  still 
be  obtained  by  producing  exactly  the  same  as  before  the 
tax  was  levied.  Ten  per  cent  of  the  net  return  from  100 
units  will  leave  a  larger  amount  than  a  10  per  cent  re- 
duction from  any  other  point  in  the  schedule. 

Had  the  tax  been  a  lump  sum  of  $50  instead  of  10  per 
cent  on  net  returns,  the  result  would  have  been  the  same. 
Fifty  dollars  taken  from  $880  will  leave  a  greater  amount 
than  if  taken  from  any  other  item  in  the  schedule,  and  the 
monopolist  will  continue  to  produce  as  before  the  levy  of 
the  tax.  A  tax  upon  gross  receipts,  however,  may  cause 
a  change  in  the  supply  schedule  and  at  least  a  partial 
shifting  of  the  tax. 

The  method  of  levying  a  tax  on  monopoly-produced 
goods  is  important,  therefore,  from  the  standpoint  of 
shifting  and  incidence.  If  it  be  the  intention  of  the  fiscal 
authorities  to  levy  a  tax  which  has  the  possibility  of  being 
shifted,  then  it  will  be  placed  upon  the  units  of  commodi- 
ties produced,  or  possibly  upon  the  gross  receipts.  If, 
however,  no  shifting  be  desired,  and  it  is  contemplated 
that  the  monopoly  must  bear  the  entire  tax  burden,  the 
levy  will  either  be  in  lump  sum  or  on  the  net  returns. 
Some  of  the  practical  considerations  of  the  method  of  levy 
will  be  considered  elsewhere. 

99.  Taxes  on  Competitively  Produced  Goods  Have 
Varying  Effects. — No  general  conclusion  can  be  given  as 
to  the  extent  to  which  taxes  are  shifted  when  they  are 
placed  upon  goods  which  are  produced  under  competitive 
conditions.  Ordinarily  the  tax  will  be  shifted  to  some 
extent,  but  in  the  process  the  price  of  the  commodity  may 
be  changed  by  an  amount  less  than  the  tax,  greater  than 
the  tax,  or  by  an  amount  just  equal  to  the  tax.  The  price 


THE  SHIFTING  AND  INCIDENCE  OF  TAXES     173 

will  change  according  to  the  different  conditions  of  cost 
of  production — increasing,  decreasing,  or  constant.  The 
effect  of  a  tax  on  goods  which  are  produced  under  condi- 
tions of  increasing  cost  can  be  most  easily  seen  by  the  use 
of  a  diagram. 

GRAPH  No.  IV 


Suppose  the  market  conditions  are  such  that  each  unit 
of  O  E  goods  is  selling  at  the  price  of  O  P — that  is,  just 
enough  to  cover  the  cost  to  the  marginal  producer.  A  tax 
is  placed  upon  each  unit  of  goods  produced,  which  in- 
creases the  cost  per  unit  by  the  amount  of  the  tax,  Cc. 
This  will  make  it  unprofitable  for  the  marginal  producer 
to  remain  in  the  field,  and  fewer  goods  will  be  produced. 
At  the  new  cost  the  demand  will  warrant  the  production 
of  only  O  B  units.  As  fewer  goods  are  produced,  however, 
the  marginal  cost  becomes  less,  and  the  new  marginal 
producer  can  sell  at  a  price  increased  by  an  amount  less 


174  OUTLINES  OF  PUBLIC  FINANCE 

than  the  tax,  and  still  cover  his  cost  of  production.  The 
new  price  per  unit  will  be  OP',  an  increase  over  the  former 
price  of  P  P'  or  B'  b.  The  tax  was  C  c  or  B'  b',  so  the  in- 
crease in  the  price  was  less  than  the  tax  by  bb'. 

Decreasing  and  Constant  Cost. — In  a  similar  way  dia- 
grams could  be  drawn  to  show  the  effect  of  a  tax  placed 
upon  goods  produced  under  conditions  of  decreasing  and 
constant  costs.  In  case  the  tax  is  levied  upon  goods  pro- 
duced under  conditions  of  decreasing  costs,  the  price  will 
increase,  but  by  an  amount  greater  than  the  tax.  The 
producer  will  have  to  recoup  himself  for  the  tax,  and  in 
addition  make  up  for  the  greater  cost  per  unit  as  fewer 
goods  are  produced. 

In  the  case  of  goods  produced  under  constant  costs, 
since  the  cost  of  each  unit  is  the  same  no  matter  how 
many  are  produced,  the  final  result  of  a  tax  will  be  to  in- 
crease the  price  by  the  amount  of  the  tax.  If  competition 
has  not  worked  itself  out  until  the  selling  price  is  equal 
to  the  cost  of  production,  then  a  tax  may  make  no  change 
in  price.  The  producer  may  pay  the  tax  out  of  the  differ- 
ential above  costs,  and  leave  production  as  before.  Here 
the  tax  is  not  shifted,  and  the  consumer  is  the  gainer. 

Ideas  of  justice  and  expediency  which  authorities  may 
hold  will  help  to  determine  upon  what  class  of  goods 
taxes  will  be  levied.  If  it  be  decided  that  prices  should  be 
affected  as  little  as  possible,  while  little  consideration  is 
given  to  marginal  producers,  taxes  will  be  secured  from 
such  extractive  industries  as  agriculture,  mining,  and  for- 
estry, because  of  their  condition  of  increasing  costs  of 
production.  If  it  be  decided  that  industry  should  be  left 
as  intact  as  possible  and  that  the  consumer  can  bear  the 
price  increases,  then  the  objects  of  taxation  will  be  those 
produced  by  large-scale  establishments. 

100.  Shifting  of  Taxes  Is  Influenced  by  the  Elasticity  of 
Supply  and  Demand. — Important  conditions  which  in- 
fluence and  modify  the  principles  of  tax  shifting  which 
have  just  been  considered,  are  the  elasticity  of  supply 


THE  SHIFTING  AND  INCIDENCE  OF  TAXES    175 

and  demand.  A  supply  may  be  said  to  be  elastic  when  a 
small  change  in  price  would  cause  a  perceptible  change 
in  the  amount  of  goods  produced.  If  a  large  part  of  a 
supply  of  goods  were  produced  at  practically  a  uniform 
cost,  and  this  were  near  the  selling  price,  it  would  be 
impossible  for  producers  to  bear  an  appreciable  tax  burden 
without  greatly  curtailing  the  amount  of  goods  produced. 
If  the  tax  could  not  be  successfully  shifted  under  such 
conditions,  the  amount  of  goods  produced  would  be  ma- 
terially lessened.  If  there  were  a  substantial  margin 
between  cost  and  selling  price,  however,  the  tax  might  be 
borne  by  the  producer,  for  this  would  create  a  condition 
of  inelastic  supply. 

Elasticity  of  Demand. — Of  no  less  importance  is  the 
elasticity  of  demand.  The  condition  of  elastic  demand 
exists  when  a  small  change  in  price  will  cause  a  percep- 
tible change  in  demand.  The  greater  the  degree  of  elas- 
ticity the  more  difficult  it  is  to  shift  a  tax.  The  addition 
of  even  a  small  tax  to  the  current  price,  when  the  demand  is 
very  elastic,  will  cause  a  perceptible  falling  off  in  the 
demand  for  the  product.  Some  consumers  may  find  sub- 
stitutes, while  others  may  forgo  the  use  of  the  particular 
utility.  The  less  the  degree  of  elasticity  in  demand,  how- 
ever, the  easier  a  tax  may  be  shifted  to  the  consumer.  If 
the  product  be  a  necessity  for  which  there  is  no  substitute, 
then  a  tax,  to  almost  any  extent,  might  be  added  to  the 
price,  and  the  consumer  would  bear  it. 

The  effect  of  such  shifting,  however,  may  not  stop  here. 
The  consumer,  because  of  the  high  prices  which  he  must 
now  pay  for  these  necessities,  may  materially  lessen  his 
consumption  of  other  goods.  This  decreased  demand 
will  cause  a  lowering  in  their  price.  The  burden  of  such 
a  tax  then  is  noticed  in  other  lines  of  production,  for  these 
producers  must  either  curtail  production  or  accept  a  lower 
price  for  their  product. 

Direction  of  Shifting. — The  relative  elasticity  of  supply 
and  demand  has  an  important  influence  in  determining 


176  OUTLINES  OF  PUBLIC  FINANCE 

the  direction  which  the  shifting  of  a  tax  may  take.  So 
far  the  suggestion  has  been  that  taxes  are  shifted  only 
toward  the  consumer.  This  is  necessarily  true  only  when 
the  tax  is  levied  upon  the  first  stage  of  a  productive  proc- 
ess, and  not  when  it  is  levied  on  any  of  the  intermediate 
stages. 

Suppose  the  processes  in  production  are  manufacturer, 
wholesaler,  jobber,  and  retailer,  and  that  a  tax  is  placed 
upon  the  wholesaler.  He  wishes  to  shift  this,  and  may  do 
it  by  raising  his  price  to  the  jobber,  who  will  recoup  him- 
self by  exacting  more  from  the  retailer,  who  in  turn  will 
increase  the  price  to  the  consumer.  He  may  shift  the 
tax,  on  the  other  hand,  back  to  the  manufacturer,  in  re- 
fusing to  pay  as  high  a  price  as  previously  for  the  product. 
He  would  pursue  the  first  course  if  the  manufacturer  were 
already  selling  at  near  the  cost  of  production  while  the 
demand  for  the  product  was  comparatively  inelastic.  If 
there  were  a  wide  margin  between  the  manufacturer's 
cost  and  his  selling  price,  while  the  demand  were  elastic, 
he  would  pursue  the  second  course.  When  a  tax  is  levied 
on  some  intermediate  stage  of  production,  then,  its  shift- 
ing will  likely  take  the  direction  of  greatest  inelasticity. 

It  is  entirely  too  much  to  expect  that  fiscal  authorities 
should  give  the  principles  which  determine  the  shifting 
and  incidence  of  taxes  primary  consideration  in  the  levy 
of  every  tax.  It  would  be  well,  however,  for  them  to  have 
a  thorough  knowledge  of  these  principles,  while  more 
frequent  attempts  at  their  application  might  help  to 
equalize  tax  burdens. 

ADDITIONAL  READING 

Carver,  Essays  in  Social  Justice,  chap.  xvii. 
Seligman,  The  Shifting  and  Incidence  of  Taxes. 


CHAPTER   IX 

CUSTOMS  DUTIES 

101.  Modern  Customs  Duties  Apply  Chiefly  to  Imports. 
— It  has  been  indicated  in  a  previous  chapter  that  a  cus- 
tomary part  of  early  fiscal  systems  was  to  levy  duties 
upon  goods  when  they  crossed  a  political  boundary.  They 
were  called  the  "  customary  duties/7  and  later  simply  cus- 
toms duties.  In  modern  times  they  are  usually  called 
tariff  duties,  and  much  is  said  and  written  on  the  tariff 
rather  than  on  customs  duties. 

Only  those  duties  upon  goods  which  cross  a  national 
boundary  line,  or  the  line  of  some  customs  territory  which 
is  a  part  of  a  nation  or  combination  of  nations,  are  con- 
sidered as  customs  duties.  Duties  which  might  be  levied 
by  a  city  upon  goods,  either  coming  hi  or  going  out  over 
its  boundary,  would  not  come  under  this  category. 
Neither  would  levies  made  upon  goods  going  from  one 
part  of  the  country  to  another,  as  from  one  state  or 
province  to  another,  nor  would  those  which  might  be 
placed  upon  goods  passing  through  a  country  be  classed 
as  customs  duties. 

In  the  earlier  development  of  these  duties,  levies  upon 
goods  going  out  of  the  countries  were  as  important  and 
significant  as  the  ones  upon  goods  coming  in.  Permission 
from  the  government  to  secure  gain  by  trading  with  for- 
eigners was  considered  a  valuable  privilege,  and  conse- 
quently a  charge  was  made.  Likewise  it  was  considered 
perfectly  proper  to  tax  a  foreigner  who  secured  profits 
from  trading  with  the  citizens  of  another  country. 

As  nations  developed,  however,  the  relative  importance 


178  OUTLINES  OF  PUBLIC  FINANCE 

of  these  two  classes  of  duties  changed.  The  growth  of  the 
mercantilistic  sentiment  had  much  to  do  with  the  decline 
of  duties  on  exports.  Apparently  one  of  the  easiest  ways 
to  augment  the  growth  of  the  money  wealth  of  a  country 
was  to  stimulate  exports  and  retard  imports,  so  duties 
were  generally  removed  from  exports.  Frequently  gov- 
ernments went  further  than  this  and  gave  bounties,  in 
one  form  or  another,  upon  goods  which  went  to  another 
country.  The  claim  of  mercantilism  has  lost  much  of  its 
strength,  yet  duties  on  exports  have  not  regained  their 
early  importance. 

It  should  not  be  inferred  that  export  duties  find  no  place 
in  modern  fiscal  systems.  In  comparatively  recent  years 
England  used  an  export  duty  on  coal,  with  the  combined 
purpose  of  conserving  the  supply  and  raising  revenue. 
Export  duties  still  fill  an  important  place  in  the  fiscal 
systems  of  Turkey,  India,  and  a  few  other  countries,  and 
are  used  upon  a  few  products  in  some  European  countries. 
As  a  general  rule,  however,  customs  duties  and  import 
duties  are  practically  synonymous  in  the  programs  of 
most  important  countries. 

1 02.  Various  Motives  May  Prompt  the  Levy  of  Customs 
Duties. — The  two  most  important  motives  which  prompt 
governmental  authorities  to  levy  customs  duties  are  to 
secure  revenue,  and  to  protect  home  industries  from  for- 
eign competition.  These  duties  are  known,  respectively, 
as  revenue  duties  and  protective  duties,  or  tariff  for 
revenue  only,  and  protective  tariff.  Other  motives  some- 
times prompt  the  levy  of  tariffs,  but  they  usually  sink 
into  insignificance  when  compared  with  these  two. 

Revenue  Duties. — The  most  evident  tariffs  for  revenue 
only  are  those  placed  upon  goods  which  could  not  be  pro- 
duced Vithin  the  country,  or  which  could  not  be  produced 
without  great  disadvantage.  It  might  be  possible  to  place 
such  a  high  tariff  upon  coffee  that  it  would  become  profit- 
able to  build  greenhouses  and  grow  coffee  in  the  United 
States.  Until  such  a  result  would  begin  to  transpire,  how- 


CUSTOMS  DUTIES  179 

ever,  the  tariff  would  be  one  for  revenue  only.  The  rates 
might  be  raised  to  a  point  where  little  revenue  would  be 
received  because  of  the  small  amount  of  goods  imported, 
but  still  it  has  given  no  protection  to  the  coffee  industry 
because  it  has  resulted  in  the  establishment  of  no  coffee 
industry  in  this  country. 

If  the  maximum  amount  of  revenue  be  desired,  concern 
must  be  had  as  to  how  much  an  increase  in  duties  will 
cause  a  decrease  in  the  amount  of  goods  imported.  If  the 
duties  were  placed  upon  a  good  which  could  not  be  pro- 
duced at  home,  and  for  which  the  demand  were  absolutely 
inelastic,  there  would  be  no  limit  to  the  tax  that  could  be 
placed  with  an  ever-increasing  return. 

Goods  only  possess  the  above  characteristics  in  degree, 
however,  and  some  to  only  a  very  small  degree.  Increase 
in  prices,  then,  to  recover  the  increase  in  duties,  will 
sooner  or  later  drive  the  marginal  consumer  to  go  without 
the  taxed  goods,  or  to  use  substitutes,  either  of  which  will 
lessen  the  demand  for  the  goods,  hence  lessen  the  imports 
and  the  amount  of  revenue.  The  problem  of  levying  a 
tariff  so  as  to  get  the  highest  revenue  is  much  the  same  as 
the  problem  of  monopoly  price,  for  exactly  the  same 
principles  must  be  considered. 

Revenue  Tariff  and  Industry. — While  a  tariff  for  rev- 
enue only  is  not  calculated  to  affect  industry,  it  cannot 
escape  doing  it  to  a  greater  or  less  degree.  Consider  again 
the  example  of  coffee.  It  has  been  coming  into  the  coun- 
try without  duty;  there  was  a  certain  demand,  and  a 
price  established.  If  the  duty  is  increased,  and  the  price 
raised  to  meet  it,  the  marginal  coffee  drinkers  will  begin 
to  drink  tea,  postum,  or  cocoa.  This  creates  a  demand 
for  products  of  another  industry — the  duty  in  effect  is 
protecting  it  from  the  former  competition  of  the  coffee 
industry. 

The  above  situation  would  be  different  if  the  demand 
for  coffee  were  inelastic  or  nearly  so.  As  the  price  of  coffee 
would  rise,  more  of  the  consumer's  purchasing  power 


180  OUTLINES  OF  PUBLIC  FINANCE 

would  be  needed  to  supply  his  want  for  coffee,  and  he 
would  have  a  smaller  remainder  with  which  to  buy  wool- 
ens, cottons,  and  other  goods.  These  industries  would 
suffer  because  of  a  revenue  tax  on  coffee.  It  is  easily  seen, 
then,  that  no  matter  how  purely  a  tariff  is  for  revenue  it 
must  have  some  indirect  effect  upon  industry  through  the 
action  of  the  laws  of  price. 

Protective  Duties. — The  levy  of  a  protective  duty  is 
motivated,  primarily,  by  its  anticipated  effect  upon  in- 
dustry, rather  than  by  any  considerations  of  revenue. 
The  purpose  is  to  lessen  the  importation  of  foreign  goods, 
cause  a  rise  in  prices,  and  thereby  stimulate  the  develop- 
ment of  such  an  industry  at  home.  It  is  expected  to 
drive  industry  into  fields  which  would  be  unattractive  if 
no  such  duty  existed. 

The  diversification  of  industry  secured  by  a  protective 
tariff  comes  at  the  expense  of  other  industries.  As  the 
price  which  must  be  paid  for  the  protected  product  goes 
up,  the  consumer  has  a  smaller  remainder  with  which  to 
purchase  other  commodities.  At  the  same  time  the  tend- 
ency will  be  to  raise  wages  in  these  other  industries  by 
taking  away  a  part  of  their  supply  of  labor  to  work  in  the 
new  industry.  The  direct  effect  of  a  protective  tariff  is 
easily  seen — it  produces  a  new  industry  in  the  country. 
The  indirect  effects,  however,  are  just  as  certain,  yet  not 
so  easily  seen,  while  they  are  often  impossible  to  calculate. 
It  is  a  safe  assertion,  moreover,  that  a  protective  tariff  is 
not  an  institution  which  gives  something  for  nothing. 

Protective  and  Revenue  Duties. — In  most  modern  tariff 
duties  the  ideas  of  revenue  and  protection  are  not  entirely 
separated.  A  duty  may  bring  a  large  amount  of  revenue 
and  give  a  small  amount  of  protection,  or  give  a  large 
amount  of  protection  and  continue  to  produce  some 
revenue.  The  more  protection  a  duty  gives,  however,  the 
less  will  be  the  revenue  received,  while  a  duty  which  would 
give  absolute  protection,  by  eliminating  the  importation 
of  goods,  would  destroy  revenues. 


CUSTOMS  DUTIES  181 

Suppose  that  woolen  cloth  of  a  certain  grade,  produced 
under  competitive  conditions  in  England,  can  be  sold  in 
this  country  for  fifty  cents  a  yard  in  a  sufficient  amount 
to  supply  the  need.  A  small  amount  could  be  produced 
by  the  mosr  favored  producer  here  at  seventy-five  cents 
a  yard,  and  enough  to  supply  the  need  at  ninety  cents  a 
yard.  To  simplify  calculations,  assume  an  absolutely 
inelastic  demand  for  the  cloth.  With  no  tariff  whatever, 
it  is  evident  that  no  cloth  will  be  produced  here,  but  will 
be  imported,  and  sell  for  fifty  cents  a  yard.  The  fiscal 
authorities  decide  that  some  revenue  should  be  obtained 
from  the  importation  of  this  commodity,  and  levy  a  duty 
of  twenty  cents  a  yard.  This  is  purely  a  revenue  tariff, 
because  the  increase  in  price  that  is  likely  to  follow  is  not 
sufficient  to  allow  production  at  home. 

If  the  duty  is  raised  to  thirty  cents  a  yard  it  becomes 
partially  protective,  for  it  allows  the  most  favored  pro- 
ducer to  market  his  small  amount  of  cloth.  Upon  this, 
however,  the  government  receives  no  revenue,  since  it  is 
not  imported.  The  buyer  of  the  cloth  is  paying  the  higher 
price  caused  by  the  duty,  but  to  the  home  producer  rather 
than  to  the  government.  Now  assume  a  wholly  protective 
duty,  say  of  forty-five  cents  a  yard.  The  English  pro- 
ducers cannot  now  compete  with  the  home  producers, 
who  can  supply  the  desired  quantity  at  ninety  cents  a 
yard.  The  government  gets  no  revenue,  since  importa- 
tion has  ceased.  The  buyers  of  cloth  pay  forty  cents  more 
a  yard  for  the  cloth,  but  to  the  new  industry  rather  than 
to  the  government. 

It  is  sometimes  pointed  out  that  the  government  does 
not  wholly  destroy  the  possibility  of  revenue  by  granting 
an  absolutely  protective  tariff,  because  the  patrimony  of 
the  state  is  increased  to  the  extent  of  the  protected  indus- 
try, upon  which  the  government  can  draw  for  support. 
This  is  true  only  when  the  protected  industry  is  given  a 
start,  and  can  soon  stand  on  its  own  feet.  As  long  as  an 
artificial  price  is  maintained  by  protection,  however,  the 


182  OUTLINES  OF  PUBLIC  FINANCE 

patrimony  represented  by  the  new  industry  simply  repre- 
sents a  patrimony  subtracted  from  other  industries. 

Other  Tariffs. — Tariffs  are  sometimes  levied  to  retaliate 
for  the  duties  laid  by  another  country,  are  sometimes 
modified  to  reciprocate  for  favors  shown  by  another  coun- 
try, and  are  sometimes  used  to  attempt  to  equalize  the 
costs  of  production  between  countries.  Many  of  the 
European  duties  which  are  levied  against  American  goods 
are  to  retaliate  for  the  high  tariffs  levied  by  this  country. 
The  proposed  reciprocity  treaty  with  Canada  a  few  years 
ago  was  an  attempt  to  make  concessions  between  the  two 
countries.  An  agreement  was  not  reached  because  of  the 
strong  protectionist  sentiment. 

The  French  tariff  represents  a  system  based  upon  the 
reciprocity  principle.  It  is  known  as  a  maximum-mini- 
mum tariff — that  is,  a  certain  maximum  tariff  is  levied 
from  which  concessions  are  made  to  countries  which  grant 
favors  to  France.  A  somewhat  similar  provision  is  found 
in  our  tariff  law  of  1909,  except  that  it  partakes  more  of 
the  nature  of  a  retaliatory  measure.  Certain  minimum 
tariffs  are  levied,  which  are  increased  against  those  coun- 
tries which  have  tariff  legislation  unfavorable  to  the 
United  States. 

When  a  tariff  to  equalize  costs  is  used,  it  is  expected 
that  neither  home  nor  foreign  producer  will  have  any 
advantage  over  the  other,  and  that  healthy  competition 
can  continue  between  the  two.  In  the  example  of  woolen 
cloth  used  above,  a  forty  cents  a  yard  duty  would  be 
such  a  tariff.  In  actual  practice,  however,  because  of  the 
continual  changing  aspects  of  industry,  the  maintenance 
of  such  a  scheme  is  next  to  impossible. 

Another  attempt  to  use  the  tariff  as  an  equalizer  of 
costs  is  the  adoption  of  what  is  sometimes  called  the  com- 
pensating tariff.  This  occurs  when  an  increase  is  granted 
in  the  duties  levied  on  manufactured  products  sufficient 
to  offset  any  duties  which  have  been  levied  on  the  raw 
materials  used  by  the.  industry  which  m^kes  the  manu- 


CUSTOMS  DUTIES  183 

factured  products  in  question.  Tariffs  of  this  nature 
have  been  particularly  applicable  in  the  case  of  woolens. 
With  every  increase  in  the  duty  on  raw  wool,  the  manu- 
facturers felt  they  must  have  a  proportionate  increase  in 
the  duties  on  manufactured  cloth  to  compensate  for  their 
increased  costs  occasioned  by  the  tariff  on  raw  wool. 
Such  tariffs  may  also  be  used  to  compensate  for  the  use 
of  excise  taxes.  When  an  excise  tax  is  placed  upon  goods 
produced  within  a  country,  a  tariff  of  the  same  amount 
is  placed  upon  goods  imported  into  the  country. 

In  most  countries  a  relatively  greater  amount  of  atten- 
tion is  being  paid  to  the  revenue  features  of  tariffs  than  to 
the  protective  issues.  Two  reasons  can  be  seen  for  this. 
First,  the  need  for  increased  funds  has  grown  rapidly,  and 
second,  the  avenues  open  to  central  governments  for  rais- 
ing funds  have  been  limited. 

103.  The  Incidence  of  Customs  Duties  Is  Important. — 
The  principle  of  shifting  and  incidence  has  no  more  im- 
portant application  to  any  part  of  a  revenue  system  than 
to  customs  duties.  To  the  uninformed  it  has  appeared 
that  the  importer  has  simply  added  the  amount  of  the 
duty  to  the  former  price,  and  that  the  consumer  conse- 
quently has  borne  the  burden.  The  problem  of  shifting, 
however,  does  not  permit  of  such  a  simple  solution.  The 
underlying  principles  of  shifting  and  incidence,  discussed 
in  the  preceding  chapter,  apply  as  much  to  customs  duties 
as  to  any  other  form  of  revenue. 

Elasticity  of  Demand  and  Supply. — The  two  controlling 
factors  in  the  shifting  of  a  customs  duty,  then,  are  the 
elasticity  of  demand,  and  the  elasticity  of  supply.  If  the 
demand  were  absolutely  inelastic,  then  the  importer  could 
continue  to  import  as  many  goods  as  before,  and  sell  them 
at  a  price,  increased  by  the  amount  of  the  duty.  Such  a 
situation,  however,  would  rarely  exist,  and  the  direction 
which  the  shifting  will  take  will  depend  upon  the  relative 
elasticity  of  demand  and  supply.  More  frequently  than 
has  been  supposed,  a  part  of  the  burden  at  least  will  rest 


184  OUTLINES  OF  PUBLIC  FINANCE 

upon  the  importer.  This  happens  when  the  price  is  either 
not  raised  at  all  or  raised  by  an  amount  equal  to  only  a 
part  of  the  tax.  Consideration  will  be  given  to  the  possi- 
bility of  shifting  import  duties  in  only  a  few  assumed 
cases. 

Influence  of  Extended  Market. — It  is  seldom  true  that 
any  one  country  is  the  sole  market  for  an  imported  good. 
The  laws  of  trade  will  have  so  worked  themselves  out, 
under  existing  conditions,  that  the  seller  will  be  receiving 
approximately  the  same  net  return  from  the  sales  in  the 
various  countries.  If,  now,  one  of  these  countries  levies 
an  additional  tax,  it  will  be  more  profitable  to  send  some 
of  the  goods  to  other  countries  until  the  diminished  supply 
would  so  raise  the  price  as  to  bring  about  again  an  equi- 
librium of  profits.  This  would  come  about  before  the 
price  had  raised  by  quite  the  amount  of  the  tax,  because 
the  increased  supply  to  the  other  countries  would  lower 
the  price  there.  In  this  case  the  larger  part  of  the  tax  is 
shifted  to  the  consumer,  while  only  a  minor  part  is  felt  by 
the  producer. 

Importer  Bears  Burden  of  Duty. — In  some  cases,  though 
rarely,  a  large  share  of  the  tax  burden  may  rest  upon  the 
producer  or  importer.  In  case  the  demand  could  be  easily 
supplied  by  home  producers  at  a  slightly  higher  price, 
while  this  market  is  necessary  for  the  disposition  of  the 
foreign  product,  the  foreigner  may  bear  the  whole  burden 
of  the  tax  rather  than  allow  the  potential  home  producer 
to  occupy  the  field.  The  situation  would  be  temporary 
if  he  expected  to  dispose  of  only  an  existing  stock  of  goods 
which  would  otherwise  be  lost,  but  which  could  not  con- 
tinue to  be  produced  with  the  added  expense  of  the  tax. 
If,  however,  the  former  margin  between  cost  and  selling 
price  had  been  sufficient  to  allow  the  payment  of  the  tax 
and  still  continue  to  produce,  the  situation  would  be 
permanent. 

It  may  be  possible,  moreover,  that  a  particular  country 
constitutes  practically  the  entire  market  for  products.  If 


CUSTOMS  DUTIES  185 

the  demand  for  these  be  strongly  elastic,  the  producer 
will  bear  the  tax  until  he  can  change  the  nature  of  his 
production.  He  may  lose  by  bearing  the  burden,  but  he 
would  lose  more  by  the  immediate  curtailment  in  demand 
through  an  increased  price.  If  the  commodity  of  impor- 
tation is  one  which  is  largely  used  as  a  substitute  for 
another,  which  can  be  obtained  at  small  increase  in  price, 
or  if  it  be  one  for  which  a  satisfactory  substitute  can  be 
obtained  at  a  small  additional  cost,  it  will  be  impossible 
to  increase  the  price  perceptibly  to  offset  duties,  for  by 
so  doing  the  market  would  be  destroyed.  The  shifting 
could  be  accomplished  only  if  the  price  of  the  other 
product  should  advance  sufficiently. 

Other  hypothetical  cases  might  be  given  to  show  the 
varying  phases  of  the  incidence  of  customs  duties.  Enough 
have  been  given,  however,  to  show  that  the  laws  of  price 
are  the  determinants.  In  general,  when  the  demand  is 
inelastic  and  the  supply  elastic,  the  conditions  are  favor- 
able for  the  shifting  of  the  tax,  while  the  opposite  condi- 
tions make  it  unfavorable.  The  possible  effect  of  an  at- 
tempted shifting  upon  the  home  production  of  goods  is 
always  a  modifying  factor.  It  should  not  be  forgotten, 
moreover,  that  even  when  the  price  can  be  raised  by  the 
full  amount  of  the  tax,  some  burden  is  felt  by  the  pro- 
ducer because  of  the  decrease  in  the  demand  for  his  goods. 

104.  Problems  Arise  from  the  Use  of  Customs  Duties. 
— The  use  of  customs  duties  has  developed  a  number  of 
perplexing  difficulties.  One  of  the  first  to  develop  was 
that  of  smuggling.  When  a  country  has  a  large  frontier 
line,  with  many  possible  approaches,  it  is  difficult  to  pro- 
hibit some  goods  from  getting  in  without  the  knowledge 
of  the  officials.  This  is  especially  true  of  goods  of  small 
bulk  and  great  value,  such  as  precious  stones.  The  duty, 
on  a  value  basis,  is  likely  to  be  high  enough  to  make  smug- 
gling profitable.  If  such  goods  are  not  taxed,  a  source 
which^is  easily  able  to  bear  tax  burdens  is  allowed  to 
escape. 


18G  OUTLINES  OF  PUBLIC  FINANCE 

Method  of  Levy. — The  method  of  levy  is  an  important 
problem  which  always  confronts  customs  administrators. 
There  are  two  important  methods,  each  possessing  ad- 
vantages and  disadvantages.  One  class  of  levy  is  known 
as  ad  valorem,  and  the  other  as  specific.  The  base  for  the 
levy  of  ad  valorem  duties,  as  the  term  suggests,  is  the 
value  of  the  goods.  Specific  duties  are  levied  upon  some 
other  unit  than  value,  such  as  volume,  length,  or  weight. 
A  specific  duty  would  be  upon  each  gallon,  yard,  or  hun- 
dredweight. Many  objects  bear  both  classes  of  duties, 
while  some  bear  only  the  ad  valorem  or  specific  duties. 

Objections  to  Specific  Duties. — Specific  duties  possess 
the  advantage  of  being  simple  and  easy  to  collect.  Fraud 
and  evasion  are  comparatively  difficult.  They  do  not, 
however,  conform  to  theories  of  justice,  since,  in  effect, 
they  are  regressive.  Heavier  burdens  are  placed  upon  the 
less  valuable  goods  of  a  class  than  upon  the  more  valuable, 
since  some  other  criterion  than  value  is  made  the  base  of 
the  tax.  The  tax  burden  does  not  fluctuate,  moreover, 
whether  the  price  to  be  received  is  high  or  low.  The  gen- 
eral result  is  that  they  are  taxes  of  increasing  burden  in  a 
period  of  falling  prices,  and  the  opposite  when  prices  are 
rising.  Their  administrative  simplicity,  however,  gives 
them  their  place  as  a  part  of  customs  duties. 

Difficulties  with  Ad  Valorem  Duties. — Ad  valorem  duties 
have  the  advantage  of  falling  upon  value,  the  most  just 
base  of  levy,  yet  many  possibilities  of  fraud  are  presented. 
The  duties  have  frequently  been  evaded  through  fictitious 
invoices,  especially  when  the  goods  were  shipped  by  the 
agent  of  an  American  buyer.  Goods  of  high  value  have 
often  been  placed  in  consignments  of  a  lower  value,  and 
have  consequently  escaped  the  higher  duty.  In  some  cases 
goods  have  been  artificially  colored  to  resemble  those  of  a 
lower  value,  as,  for  example,  the  coloring  of  better  grades 
of  sugar.  Where  a  minute  classification  exists,  as  in  our 
woolen  schedule,  it  is  often  difficult  to  accurately  classify 
the  goods.  To  reduce  these  fraudulent  practices  to  a 


CUSTOMS  DUTIES  187 

minimum,  and  hence  secure  a  reasonable  degree  of  justice, 
a  large  amount  of  administrative  machinery  is  required. 

Administrative  Machinery. — The  need  for  administra- 
tive machinery  can  be  illustrated  by  a  brief  review  of  the 
method  of  levy  in  force  in  the  United  States.  The  importer 
receives  a  consular  invoice,  which  contains  a  description 
of  the  merchandise,  including  value,  discounts,  charges, 
etc.  He  then  makes  entry  of  these  goods,  with  their  proper 
description,  with  the  rates  that  he  considers  applicable, 
and  pays  the  gross  amount  of  duty  thus  determined.  The 
inspector  then  issues  a  permit  for  delivery,  with  the  ex- 
ception of  one  package  in  every  ten  included  in  the  im- 
portation. In  no  case  is  less  than  one  article  retained 
from  each  invoice. 

These  packages  or  articles  are  retained  for  the  purpose 
of  appraisement.  The  value  is  determined  and  the  rate 
checked  with  that  used  by  the  merchant.  In  case  the  rate 
which  the  merchant  used  was  too  low,  the  difference  is 
collected,  with  penalties  for  attempted  fraud.  All  protests 
from  the  merchants  are  heard  by  a  board  of  general  ap- 
praisers, provided  the  protest  is  filed  within  ten  days  after 
the  merchant  has  been  notified  of  the  charges.  The  board 
examines  witnesses,  calls  in  experts,  and  after  a  thorough 
investigation  renders  a  decision.  Appeals  may  be  made, 
however,  to  the  Circuit  Court  within  thirty  days. 

The  complexities  and  uncertainties  of  customs  duties, 
especially  of  those  in  the  United  States,  have  prevented 
their  indorsement  as  an  unqualified  success.  The  laws 
are  cumbersome  and  difficult  to  understand.  Duties  are 
laid  upon  articles  with  apparently  no  definite  scheme  hi 
mind.  The  returns  have  been  very  irregular,  often  failing 
the  government  when  funds  were  needed  most.  With 
proper  legislative  forethought  such  difficulties  could  be 
greatly  lessened,  and  customs  duties  could  be  made  a  more 
satisfactory  part  of  the  fiscal  system. 

105.  Definite  Principles  Should  Be  Followed  in  Levying 
Customs  Duties. — If  Adam  Smith's  second  canon  of  taxa- 


188  OUTLINES  OF  PUBLIC  FINANCE 

tion — that  the  tax  which  each  individual  is  bound  to  pay 
ought  to  be  certain,  and  not  arbitrary — is  applicable  to 
any  form  of  revenue,  it  should  apply  to  the  levy  of  customs 
duties.  No  other  form  of  revenue  has  such  great  possi- 
bilities for  influencing  the  industrial  stability  of  a  coun- 
try. It  is  not  so  much  a  question  of  high  duties  or  low 
duties,  of  revenue  or  protective  tariff,  as  it  is  a  question 
of  being  able  to  know  what  to  expect. 

A  country  can  ill  afford  to  make  a  political  football  of 
its  tariff  policies,  yet  this  has  been  true  in  the  United 
States  practically  from  the  beginning.  Attempts  to  use 
nonpartisan  tariff  boards  have  been  of  no  avail,  and  in- 
dustry continues  to  fear  a  change  in  administration  be- 
cause of  what  may  happen  to  the  tariff.  Where  such  un- 
certainty and  instability  exist,  it  is  impossible  to  rely  upon 
customs  duties  for  any  definite  amount  of  revenue,  and 
avenues  must  always  be  kept  open  through  which  de- 
ficiencies can  be  supplied. 

Aside  from  the  deranging  of  industry,  then,  an  indefinite 
tariff  policy  also  creates  instability  in  the  remainder  of  a 
fiscal  system.  The  United  States  would  do  well  to  follow 
the  example  of  some  of  the  European  countries  in  adopt- 
ing and  maintaining  some  definite  policy,  but  the  accom- 
plishment of  such  an  end  seems  surrounded  with  insur- 
mountable difficulties.  Because  the  tariff  may  have  such 
important  fiscal  and  industrial  consequences,  and  because 
the  United  States  is  so  far  from  any  settled  policy,  it  will 
be  well  to  review  somewhat  in  detail  the  tariff  struggle  as 
it  has  been  waged,  not  only  in  the  United  States,  but  in  a 
few  other  important  countries. 

106.  Early  United  States  Tariffs  Combined  Fiscal  and 
Protective  Aspects. — Two  attempts  were  made  to  secure 
a  national  tariff  before  the  adoption  of  the  constitution  in 
1789,  which  gave  Congress  practically  the  exclusive  power 
to  levy  such  duties.  These  attempts  were  made  near  the 
end  of  the  Revolution,  when  other  sources  of  revenue 
were  failing  to  supply  the  needed  funds.  In  1781  Congress 


CUSTOMS  DUTIES  189 

hoped  to  secure  the  acquiescence  of  the  states  in  the  levy 
of  a  duty  for  the  purpose  of  raising  revenue.  The  pro- 
posal was  a  5  per  cent  tax  upon  all  imports  except  muni- 
tions and  certain  other  specified  articles.  All  the  states 
reacted  favorably  except^Rhode  Island,  and  no  amount 
of  persuasion  or  remonstrance  was  able  to  break  down  the 
opposition.  The  principal  objections  were  that  such  taxa- 
tion would  fall  more  heavily  upon  the  commercial  states, 
that  it  was  introducing  officials  within  her  borders  over 
whom  she  would  have  no  control,  and  besides  it  was  open- 
ing the  way  for  an  indefinite  drain  upon  the  resources  of 
the  state  by  the  Federal  government. 

The  second  attempt,  in  1783,  was  no  more  successful 
than  the  first.  The  amendment  which  was  proposed  pro- 
vided for  specific  duties  on  certain  classes  of  goods,  as 
liquors,  tea,  coffee,  and  molasses,  and  an  ad  valorem  rate 
on  all  other  commodities.  The  action  was  to  be  limited  to 
twenty-five  years  and,  in  an  attempt  to  make  it  more 
attractive,  the  returns  were  not  to  be  used  to  meet  the 
current  expenses  of  the  government,  but  only  for  the  pay- 
ment of  interest  on  the  pub  ic  debt.  In  order  to  eliminate 
a  previous  objection  of  Rhode  Island,  the  collection  was 
to  be  put  in  the  hands  of  the  state  officials. 

The  spirit  of  commercial  freedom,  which  at  this  time 
had  such  a  hold  on  European  states,  was  making  itself  felt 
on  this  side  of  the  Atlantic.  The  great  need  for  revenues 
by  the  states  also  made  some  of  them  reluctant  to  allow 
the  Federal  government  to  enter  this  field.  The  consent 
of  all  the  states  was  finally  obtained  except  that  of  New 
York,  whose  opposition  could  not  be  broken. 

From  the  attitude  which  had  been  displayed  previous 
to  the  adoption  of  the  Constitution,  it  is  not  surprising 
that  much  dissatisfaction  was  expressed  when  the  states 
were  practically  prohibited  from  using  customs  duties. 
It  was  considered  to  be  entirely  too  much  of  an  encroach- 
ment on  the  rights  of  the  states.  It  was  not  long  after  the 
adoption  of  the  Constitution,  however,  until  Congress 


190  OUTLINES  OF  PUBLIC  FINANCE 

began  to  make  use  of  its  prerogative  to  use  the  tariff. 
Revenue  was  sorely  needed,  internal  tax  levies  were  abhor- 
rent, direct  taxes  could  not  be  laid  until  a  census  had 
been  taken,  consequently  the  tariff  presented  the  most 
logical  field. 

Tariff  of  1789.— On  July  4, 1789,  after  a  debate  of  nearly 
two  months,  the  first  tariff  legislation  of  the  new  govern- 
ment was  enacted.  The  time  in  the  debate  was  consumed 
by  attempting  to  fix  the  rates,  and  by  attempting  to  agree 
upon  the  measure  of  protection  which  should  be  afforded. 
Much  discussion  has  arisen  over  the  question  of  whether 
this  first  tariff  act  was  a  protective  measure.  The  rates 
were  so  low  that  little  protective  influence  could  be  ex- 
pected. Specific  duties  were  placed  upon  some  thirty 
lands  of  goods,  while  ad  valorem  rates,  which  ranged  from 
73/2  to  15  per  cent,  were  levied  upon  a  few  goods.  A 
general  ad  valorem  tax  of  5  per  cent  was  levied  upon 
all  commodities  which  were  not  covered  by  the  other 
duties. 

While  these  rates  do  not  give  evidence  of  a  very  strong 
protectionist  feeling,  yet  the  preamble  to  the  bill  would 
indicate  that  this  was  an  important  consideration.  It 
states  that,  "  Whereas,  it  is  necessary  .  .  .  and  for  the  en- 
couragement and  protection  of  manufacture,  that  duties 
be  laid."  It  appears  that  thus,  in  the  very  beginning,  the 
tariff  legislation  was  not  to  be  confined  to  merely  fiscal 
purposes.  The  Act  was  to  remain  for  seven  years,  yet 
many  minor  details  along  with  some  rates  were  changed 
as  need  arose. 

107.  The  War  of  1812  Increased  the  Sentiment  for 
Protection. — The  War  of  1812,  because  of  the  dangers  im- 
posed upon  shipping,  and  because  of  the  various  regula- 
tions which  were  placed  upon  trade,  greatly  disturbed  the 
foreign  commerce  of  the  United  States.  Revenue  de- 
creased with  the  diminution  of  imports,  but  with  the  close 
of  war,  when  Europe  began  to  unload  her  accumulated 
stocks  of  goods  upon  our  markets,  the  values  of  imports 


CUSTOMS  DUTIES  191 

reached  an  unprecedented  figure,  with  a  corresponding 
increase  in  revenue. 

In  this  stimulated  importation,  however,  was  sensed 
the  destruction  of  many  of  the  American  industries  which 
had  sprung  up  from  necessity  and  under  difficulty  during 
the  war.  The  clamor  naturally  arose  for  succor.  Presi- 
dent Madison  was  an  advocate  of  some  kind  of  relief  and 
urged  protection  to  these  growing  enterprises.  The  final 
result  was  the  tariff  bill,  which  became  a  law  April  27, 
1816.  The  tariff  imposed  by  this  Act  has  often  been  desig- 
nated as  the  first  protective  tariff  of  the  United  States. 

Tariff  of  1816. — The  policy  of  protection  unquestion- 
ably superseded  any  fiscal  considerations  in  the  tariff  of 
1816.  Little  opposition  was  registered  except  in  the  South 
and  Southwest,  and  even  here  nearly  as  many  votes  were 
in  favor  of  the  measure  as  were  cast  against  it.  The  in- 
dustrial emergency  was  clearly  recognized,  and  the  coun- 
try as  a  whole  showed  its  willingness  to  come  to  the  rescue. 
It  was  not  until  later  that  sectional  feelings  were  strongly 
evidenced.  The  rates  provided  were  both  specific  and 
ad  valorem,  and  were  highest  upon  textiles,  leather,  glass, 
and  paper,  and  ranged  from  25  to  35  per  cent.  An  inter- 
esting feature  of  this  measure  was  the  introduction  of  the 
minimum  principle  in  regard  to  cotton  cloth.  All  kinds  of 
cloth  which  had  ordinarily  cost  less  than  twenty-five  cents 
a  yard  should  be  considered  under  the  application  of  the 
law  as  having  cost  that  much,  and  the  tariff  would  be 
levied  accordingly. 

For  decades  following  the  passage  of  this  law  the  tariff 
became  the  center  of  discussion  from  the  standpoint  of 
both  revenue  and  industry.  Fiscal  officials  were  interested 
in  it  because  internal  revenues  were  not  used  from  1817 
until  the  Civil  War,  and  hence  import  duties  were  the 
principal  source  of  revenue.  It  became  important  to 
industry  because  of  what  particular  individuals  and  sec- 
tions of  the  country  expected  to  accomplish  by  either 
inaugurating  or  abandoning  certain  tariff  policies, 


192  OUTLINES  OF  PUBLIC  FINANCE 

The  tariff  of  1816  had  scarcely  gone  into  action  when 
dissatisfaction  arose  from  interests  which  considered  that 
the  protection  granted  to  them  was  not  strong  enough. 
The  producers  of  iron  were  the  first  to  register  extensive 
protest  because  they  felt  the  textile  industries  were 
afforded  better  protection  than  those  who  were  engaged 
in  iron  production.  The  agitation  was  so  effective  that 
the  duties  upon  iron  were  increased  in  1820. 

Tariffs  of  1824  and  1828.— The  falling  off  in  revenues 
due  to  the  industrial  depression  of  1819  led  the  fiscal 
officials  to  ask  a  further  extension  of  tariff  duties.  Those 
engaged  in  industry  were  not  backward  in  asking  for 
further  protection,  while  many  saw  in  this  kind  of  legisla- 
tion a  method  for  enticing  foreign  capital  to  invest  in  the 
United  States.  So  effective  was  the  demand  from  the 
various  quarters  that  a  law  was  enacted  in  1824  which 
greatly  extended  and  increased  the  duties.  The  demand 
for  such  legislation,  however,  was  much  more  sectional 
than  was  that  for  protection  in  1816.  The  commercial 
interests  of  New  England,  as  well  as  the  solid  South,  were 
opposed,  so  that  the  bill  secured  a  bare  majority  of  votes 
in  the  House  of  Representatives. 

The  effect  of  the  legislation  was  to  increase  the  protec- 
tion afforded  to  manufacturers  of  textiles,  iron,  glass,  and 
cutlery.  The  mrnimum  valuation  on  cotton  goods  was 
raised,  and  this  principle  was  also  applied  to  woolens.  An 
important  feature,  which  was  destined  to  be  the  source 
of  much  difficulty  hi  the  future,  was  the  introduction  of  a 
tariff  on  raw  wool.  The  difficulty  which  this  inaugurated 
was  in  the  securing  of  a  woolen  schedule  which  would  be 
satisfactory  to  both  wool  producers  and  manufacturers  of 
woolen  materials. 

Even  though  the  duties  now  in  force  were  highly  pro- 
tective, and  apparently  satisfactory  to  some  industries, 
representatives  of  other  industries,  particularly  the 
woolen,  sought  to  seize  upon  the  existing  protectionist 
sentiment  to  secure  still  greater  increases  in  rates.  The 


CUSTOMS  DUTIES  193 

political  trickery  and  intrigue  which  resulted,  the  outcome 
of  which  was  the  tariff  of  1828,  need  not  be  reviewed  here. 
The  protection  on  woolens  was  increased  to  such  a  degree 
that  the  law  has  frequently  been  called  the  "  Woolen 
Tariff."  The  tariff,  as  a  matter  of  fact,  was  unpopular  in 
all  sections,  and  has  been  generally  called  the  "  Tariff  of 
Abominations."  Many  rates  were  excessive,  and  particu- 
lar sections  were  favored  at  the  expense  of  others.  The 
South  was  particularly  hostile,  and  the  Act  added  new  fuel 
to  the  nullification  flame  which  the  tariff  had  already 
helped  to  kindle. 

The  general  dissatisfaction,  with  its  accompanying  pro- 
tests to  Congress,  together  with  the  fact  that  a  large  sur- 
plus of  revenue  was  accumulating,  led  many  to  believe 
that  reductions  might  be  expected.  Some  attempts  were 
made  in  1830,  but  nothing  of  importance  was  accomplished 
and  the  agitation  continued.  The  necessity  of  modifying 
some  of  the  more  objectional  features  of  the  tariff  of  1828 
was  becoming  obvious.  Much  difficulty  was  encountered, 
however,  in  agreeing  on  what  the  modifications  should  be. 
A  bill  was  finally  passed  in  1832  which,  while  it  did  not 
eliminate  the  protective  features,  did  lower  some  of  the 
excessive  rates.  The  protectionists  now  hoped  that  the 
measure  was  in  a  form  that  would  not  call  forth  such 
hostile  objection. 

1 08.  The  High  Tariffs  Were  Followed  by  Reduced 
Rates. — -The  hopes  which  the  protectionist  branch  held 
for  the  tariff  of  1832  proved  to  be  ill  founded.  While  a 
part  of  the  South  appeared  satisfied,  yet  the  people  of 
South  Carolina  were  too  much  incensed  to  be  appeased  by 
such  slight  amendments  as  the  law  offered.  The  legisla- 
ture was  not  long  in  passing  what  is  known  as  the  Nulli- 
fication Act — the  tariff  law,  so  far  as  it  applied  to  South 
Carolina,  was  null  and  void. 

Compromise  Tariff. — The  Nullification  Act  was  the  sig- 
nal for  Congress  to  do  something,  and  a  bill  providing  for 
extreme  reductions  was  submitted — so  extreme  that  little 


194  OUTLINES  OF  PUBLIC  FINANCE 

hope  could  be  entertained  for  its  passage.  Henry  Clay 
came  to  the  rescue  with  a  compromise  bill,  which  was 
passed  in  1833,  and  which  is  generally  known  as  the  Com- 
promise Tariff.  The  important  features  were  the  enlarge- 
ment of  the  free  list,  and  a  gradual  reduction  of  duties,  so 
that  industries  would  have  a  chance  to  readjust  them- 
selves. All  duties  that  exceeded  20  per  cent  were  to  be 
gradually  reduced.  Every  two  years  between  1834  and 
1842  one  tenth  of  the  excess  above  20  per  cent  was  to  be 
taken  off.  On  January  1,  1842,  one  half  of  the  remaining 
excess  was  to  be  removed,  and  on  July  1  the  remainder. 
The  final  result,  then,  was  to  be  a  tariff  of  20  per  cent 
rates  or  less. 

Whether  the  law  of  1833  tied  the  hands  of  Congress  on 
tariff  legislation  until  1842  is  beyond  our  province  to 
decide.  At  any  rate  there  was  a  marked  lull  in  tariff  dis- 
cussion. The  great  falling  off  in  revenue,  due  to  the  panic 
of  1837,  led  some  to  suggest  that  the  succeeding  biennial 
reductions  should  be  canceled.  No  legislation  was 
effected,  however,  until  1842,  when  the  Whigs,  a  party 
with  the  protectionist  viewpoint,  were  in  power.  The  law 
which  was  passed  was  a  radical  departure  from  the  pre- 
vious trend  and  much  higher  rates  were  imposed. 

Some  opposition  of  course  arose,  but  this  was  kept  to 
a  minimum  because  the  treasury  was  actually  in  need  of 
increased  funds.  The  South  did  not  seriously  press  its 
claim  of  breach  of  faith  on  the  part  of  Congress.  As  pros- 
perity increased,  however,  the  tariff  again  became  a  vital 
question  and  entered  extensively  into  the  presidential 
campaign  of  1844.  The  result  of  it  all  was  the  Walker 
tariff  of  1846. 

Walker  Tariff. — Under  the  Walker  tariff  rates  in  gen- 
eral were  greatly  reduced,  and  while  it  was  not  a  free 
trade  measure,  it  has  frequently  been  designated  as  such. 
The  system  of  arranging  the  articles  under  particular 
schedules  was  inaugurated,  and  the  change  was  made 
from  specific  to  ad  valorem  duties.  The  system  of  pro- 


CUSTOMS  DUTIES  195; 

viding  warehouses,  which  has  been  continued  to  the  pres- 
ent time,  was  inaugurated  under  this  Act.  These  were 
built,  and  importers  permitted  to  store  goods  in  them,  the 
duty  to  be  paid  when  the  goods  were  removed.  In  1857 
the  rates  provided  for  under  the  Walker  tariff  were  mate- 
rially reduced,  with  no  strenuous  opposition,  and  it  seemed 
the  country  was  drifting  to  a  free  trade,  or  at  least  a 
revenue  basis,  for  its  tariff. 

109.  The  Panic  of  1857  and  the  Civil  War  Changed  the 
Course  of  Tariff  Rates. — The  tariff  of  1857  had  been  a 
law  but  a  few  months  when  a  panic  swept  the  country 
with  its  business  failures  and  consequent  treasury  deficits. 
The  protectionists  realized  this  as  a  psychological  time  to 
increase  duties,  yet  the  sentiment  for  low  tariffs  was  still 
too  strong  to  warrant  the  attempt  of  any  radical  increases. 
Many  suggestions  were  made,  but  the  bill  which  was  ap- 
proved was  one  drawn  by  Representative  Morrill,  and  is 
known  as  the  Morrill  tariff.  It  finally  became  a  law  in 
1861.  Ad  valorem  rates  were  raised  to  about  the  level  of 
the  Walker  tariff,  and  many  specific  duties  were  substi- 
tuted for  former  ad  valorem  ones.  This  Act  also  intro- 
duced the  compensating  feature,  which  continued  to  play 
an  important  part  in  tariff  legislation.  The  increase  in  the 
duty  on  raw  wool  was  met  with  a  corresponding  increase 
in  the  duty  on  manufactured  woolens. 

The  advent  of  the  Civil  War,  with  its  demands  upon  the 
treasury,  increased  the  interest  in  tariff  rates.  Some 
slight  modifications  were  made  in  1862,  but  primarily  to 
compensate  manufacturers  for  the  burdens  which  the 
newly  inaugurated  excise  tax  had  thrust  upon  them. 
Again  in  1864  a  hasty  revision  was  made,  by  which  rates 
were  greatly  increased,  partly  in  the  hope  of  increasing 
revenues,  and  partly  to  compensate  for  the  increased  bur- 
dens of  the  internal  revenues.  After  the  war  some  at- 
tempts were  made  to  revise  the  tariff  in  both  directions, 
but  practically  nothing  was  accomplished.  In  1872  a  flat 
reduction  of  10  per  cent  was  secured,  and  duties  were  re- 


196  OUTLINES  OF  PUBLIC  FINANCE 

moved  from  tea  and  coffee.  The  panic  of  1873  was  re- 
sponsible for  the  addition,  in  1875,  of  the  10  per  cent 
which  had  been  removed  in  1872. 

It  was  not  long,  however,  before  revenues  were  again 
excessive,  and  it  became  generally  recognized  that  some 
tariff  changes  were  needed.  The  appointment  of  a  com- 
mission representing  varied  interests,  in  1882,  by  Presi- 
dent Arthur,  was  met  with  general  approval.  Despite  the 
protectionist  flavor  which  was  to  be  found  in  the  commis- 
sion, it  recommended  an  average  reduction  in  the  tariff 
of  from  20  to  25  per  cent.  Congress  proceeded  to  disre- 
gard the  views  of  the  commission,  and  passed  a  tariff  law 
in  1883  which,  if  anything,  still  more  firmly  intrenched 
the  principle  of  protection. 

The  McKinley  Tariff. — The  sessions  of  Congress  which 
followed  were  the  scenes  of  many  tariff  debates.  The  two 
parties  were  becoming  more  united  in  their  stands — the 
Republican  for  protection,  and  the  Democratic  for  low 
tariffs.  The  Democrats  attempted  many  reductions,  but 
were  unsuccessful.  The  first  real  change  in  the  tariff 
after  1883  was  the  McKinley  Act,  which  became  a  law  in 
1890. 

The  McKiniey  tariff  was  a  Republican  measure,  yet  it 
purported  to  reduce  revenues.  This  it  attempted  in  two 
ways,  by  raising  some  duties  so  high  as  to  make  them  pro- 
hibitive, and  reducing  others.  The  reductions  were  on  cer- 
tain iron  and  steel  products,  while  raw  sugar  and  some  steel 
were  put  on  the  free  list.  The  net  result,  however,  was  a 
greater  intrenchment  of  the  protective  policy  because  of 
the  large  number  of  commodities  upon  which  duties  were 
increased.  Bounties  were  granted  on  sugar  produced  in 
the  United  States,  while  the  President  was  given  power  to 
levy  duties  upon  sugar,  coffee,  tea,  and  some  other  articles 
in  retaliation  to  any  country  which  was  unfavorable  to 
the  United  States  with  her  tariff  laws. 

Gorman-Wilson  Tariff. — The  McKinley  tariff  proved 
Very  unpopular  and  the  tariff  became  the  leading  issue  in 


CUSTOMS  DUTIES  197 

the  Presidential  campaign  of  1892.  The  Democratic  suc- 
cesses augured  for  the  adoption  of  tariff  revision  down- 
ward, and  this  attempt  was  made  in  the  Gorman- Wilson 
law  of  1894.  This  represented  the  first  real  lull  in  the 
steady  march  of  protection  since  the  Civil  War.  The 
changes,  however,  were  much  less  than  is  generally  sup- 
posed— the  reduction  of  rates  was  so  slight  as  to  leave  the 
principle  of  protection  unscathed.  It  was  such  an  un- 
satisfactory attempt  to  redeem  pledges  that  President 
Cleveland  refused  to  sign  the  bill,  and  allowed  it  auto- 
matically to  become  a  law. 

High  Tariffs. — Much  blame  was  attached  to  the  Demo- 
cratic administration  and  its  tariff  legislation  for  the  in- 
dustrial conditions  following  1893.  When  the  Republicans 
regained  power  in  1897  the  passage  of  high  tariff  schedules 
was  comparatively  easy.  This  was  accomplished  in  the 
Dingley  tariff  of  1897,  the  net  result  of  which  was  the 
highest  wall  of  protection  the  country  had  yet  known. 
For  a  number  of  years  little  tariff  discussion  appeared, 
but  a  feeling  gradually  arose  that  the  tariff  was  partly 
responsible  for  some  of  the  increased  costs  of  living,  and 
that  a  downward  revision  was  needed.  The  Republicans 
pledged  themselves  to  this  program,  and  offered  the 
Payne- Aldrich  Act  in  1909  as  the  fulfillment  of  this  pledge. 
Some  rates  were  lowered  while  others  were  raised,  so  that 
the  net  result  represented,  as  a  whole,  a  revision  upward 
rather  than  downward. 

Lower  Tariffs. — The  election  of  a  Democratic  adminis- 
tration in  1912,  pledged  to  lower  tariffs,  was  looked  upon 
as  an  indication  of  real  reduction.  The  result  was  the 
Underwood-Simmons  Act  of  1913.  The  rates  in  every 
schedule  were  reduced,  yet  the  measure  came  far  from 
inaugurating  a  tariff  for  revenue  only.  Large  additions 
were  made  to  the  free  list,  and  the  average  rate  of  duty 
was  materially  decreased.  The  provisions  of  the  bill  are 
so  complicated  that  they  lack  the  clearness  which  tariff 
measures  should  possess.  Provision  was  also  made  for  an 


198  OUTLINES  OF  PUBLIC  FINANCE 

expert  tariff  commission  to  investigate  and  report  upon 
tariff  needs.  The  Great  War,  unfortunately,  interfered 
with  any  results,  whether  good  or  bad,  which  might  have 
resulted  from  this  legislation,  and  consequently  no  judg- 
ment can  be  given  as  to  the  success  of  its  trial. 

Recent  Legislation. — It  was  expected  that  the  Republi- 
can successes  in  the  election  of  1920  would  result  in  tariff 
modifications.  The  rapid  decline  in  the  prices  of  agricul- 
tural products,  followed  by  the  demand  of  the  farmers  for 
some  form  of  relief,  hastened  the  attempts  to  modify  the 
tariff.  Before  the  close  of  the  Wilson  administration 
Congress  passed  the  Fordney  emergency  tariff  bill,  which 
the  President  vetoed,  and  which  failed  to  pass  over  his 
veto.  The  subcommittees  of  the  Ways  and  Means  Com- 
mittee of  the  House  at  once  began  to  recast  the  bill  for 
presentation  to  the  Sixty-seventh  Congress. 

The  emergency  tariff  bill,  as  it  is  called,  was  passed  by 
Congress  and  signed  by  President  Harding  in  May,  1921. 
The  provisions  of  the  bill  are  much  the  same  as  the  one 
vetoed  by  President  Wilson.  It  is  not  designed  to  produce 
revenue,  but  primarily  to  afford  protection  to  the  agri- 
cultural interests.  Comparatively  high  duties  are  placed 
upon  a  large  number  of  agricultural  products.  Some  aid 
is  extended  to  Eastern  manufacturers  through  the  anti- 
dumping provisions  of  the  bill.  This  emergency  tariff  is 
presumably  but  temporary  legislation,  and  Congress  has 
promised  a  thorough  revision  of  the  tariff  at  a  later  date. 
It  is  difficult  to  predict  just  what  this  will  be,  but  it  is 
likely  that  some  increase  in  tariff  rates  may  be  expected. 

Import  duties  have  always  been  an  important  source  of 
revenue,  but  it  must  be  concluded  from  the  foregoing  sur- 
vey that  the  fiscal  aspects  have  very  seldom  had  control- 
ling interest  in  the  formulation  of  our  tariff  laws.  Indi- 
vidual and  sectional  interests  have  always  been  reckoned 
with,  and  have  shown  their  influence  in  the  legislation. 
Nor  can  the  tariff  controversy  be  considered  as  settled, 
for  the  problems  of  reconstruction  have  only  increased  the 


CUSTOMS  DUTIES  199 

importance  of  the  tariff  in  fiscal  and  political  discussions. 
The  situation  calls  to  mind  a  statement  which  the  author 
remembers  his  great-grandfather  to  have  made.  He  re- 
marked that  the  first  thing  he  expected  to  hear  discussed 
when  he  awoke  in  the  next  world  was  the  tariff. 

no.  Revenue  Is  Given  First  Consideration  in  English 
Tariffs. — The  tariff  schedule  of  England  is  an  outstanding 
example  of  a  system  in  which  entire  consideration  is  given 
to  the  fiscal  aspects.  This  result  was  achieved,  however, 
only  after  a  long  process  of  evolution.  England  was  one 
of  the  first  countries  to  use  the  tariff  as  a  form  of  revenue, 
and  developed  it  extensively  during  the  seventeenth  cen- 
tury. The  growth  of  the  mercantile  doctrines  had  a 
strong  influence  during  the  eighteenth  century.  Import 
duties  were  generally  increased,  some  to  rates  which  were 
prohibitive. 

The  Revolutionary  War  and  the  French  wars  caused 
further  increases  in  many  of  the  duties  until,  at  the  close 
of  the  War  of  1812,  most  of  the  rates  were  excessively  high, 
and  applied  to  a  large  number  of  commodities.  During 
this  long  course  of  development  little  objection  developed 
to  the  gradual  expansion  of  the  duties,  and  the  list  of  goods 
to  which  they  were  to  apply.  Only  two  periods  of  reaction 
were  noticed,  and  these  were  so  brief  and  ineffective  as 
to  be  relatively  unimportant. 

Early  in  the  eighteenth  century,  when  the  continually 
increasing  rates  were  accompanied  by  a  falling  off  in 
revenues,  many  began  to  question  the  efficacy  of  the  tariff 
system  then  in  force.  The  agitation  which  arose  soon 
began  to  produce  results,  and  about  1820  duties  were  re- 
moved to  some  extent  from  raw  materials  and  food  prod- 
ucts. Again,  in  the  early  'forties,  rapid  strides  were  made 
hi  the  reduction  of  duties,  and  the  final  work  was  com- 
pleted by  1860.  Since  that  time  attention  has  been 
directed  to  the  fiscal  considerations,  with  the  result  of 
securing  practically  as  much  revenue  as  before  the  reduc- 
tion of  duties,  The  list  of  taxed  objects  is  small,  and  the 


200  OUTLINES  OF  PUBLIC  FINANCE 

system  works  in  coordination  with  the  excise  taxes  by 
which  duties  are  levied  upon  materials  which  are  also  of 
domestic  production.  Import  duties  are  levied  upon  a 
few  other  commodities  which  are  not  produced  at  home, 
such  as  tea,  coffee,  raisins,  wine,  and  tobacco.  The  ma- 
jority of  the  revenue  is  secured  from  liquors  and  tobacco. 
As  a  whole,  the  system  is  simple  and  productive,  and  has 
received  but  a  small  amount  of  criticism. 

in.  Other  Countries  Have  Used  Tariffs  for  Industrial 
and  Fiscal  Purposes. — The  use  of  some  form  of  customs 
duties  is  almost  universal.  In  scarcely  any  countiy,  how- 
ever, is  such  undivided  attention  paid  to  the  fiscal  results 
as  in  England.  In  France  the  list  of  articles  taxed  is  large, 
and  the  intention  is  to  secure  results  other  than  fiscal. 
Food  products,  raw  materials,  and  manufactured  products 
are  taxed,  on  some  of  which  the  rates  are  so  high  as  to 
give  practically  absolute  protection.  The  bulk  of  the 
revenue  has  come  from  comparatively  few  commodities, 
as  coffee,  sugar,  corn,  petroleum,  and  wines.  There  is  no 
attempt  to  correlate  the  customs  duties  with  the  internal 
revenue  duties,  as  is  done  in  England.  The  present  system 
really  dates  back  to  1791,  for  it  is  that  law,  with  modifi- 
cations, usually  for  political  or  industrial  rather  than  fiscal 
purposes,  that  is  the  basis  of  modern  French  tariffs. 

The  Italian  duties,  with  a  history  much  shorter  than 
that  of  France  or  England,  are  nevertheless  strongly  de- 
veloped. Duties  upon  articles  of  necessary  use  form  the 
central  part  of  the  system,  consequently  the  burden  falls 
heavily  upon  the  poorer  classes.  The  German  system 
represents  a  growth  from  the  customs  union  which  was 
formed  before  the  political  union  of  the  German  states. 
The  system  is  characterized  by  a  strong  protectionist 
sentiment  which  has  been  directed  toward  such  a  diversi- 
fication of  industry  so  as  to  make  the  country  self-sup- 
porting. A  majority  of  the  revenue  which  is  received 
comes  from  comparatively  few  commodities,  such  as  corn, 
coffee,  wine,  and  tobacco. 


CUSTOMS  DUTIES  201 

If  other  countries  were  reviewed  the  same  situation 
would  be  found — the  use  of  a  tariff  system  which  seeks  to 
combine  fiscal,  industrial,  and  political  ends.  In  all  the 
countries  export  duties,  which  in  the  earlier  development 
occupied  a  comparatively  important  place,  have  been 
practically  abandoned. 

ADDITIONAL  READING 

Taussig,  Tariff  History  of  the  United  States. 
Dewey,  Financial  History  of  the  United  States. 


CHAPTER  X 

EXCISE,    CAPITATION,1   AND   BUSINESS   TAXES 

112.  The  Federal  and  State  Governments  Impose  Many 
Taxes. — The  customs  duties  have  received  more  consid- 
eration than  any  other  form  of  revenue  which  has  been 
used  by  either  the  Federal  or  state  governments.  This  has 
been  because  of  the  economic  and  industrial  significance 
rather  than  because  of  any  fiscal  importance  which  may 
be  attached  to  them.  Other  sources  of  revenue  of  im- 
portance exist,  however,  which  are  no  less  remunerative. 
It  is  proposed  in  this  chapter  to  discuss  some  of  these 
sources  from  which  the  Federal  and  state  governments 
secure  funds.  The  treatment  of  a  part  of  the  sources  of 
revenue,  however,  such  as  the  taxation  of  incomes,  cor- 
porations, property,  and  inheritances,  will  be  reserved  for 
separate  chapters. 

An  important  source  of  revenue  of  the  Federal  govern- 
ment which,  like  the  customs  duties,  is  not  used  by  the 
states  or  minor  political  units,  is  what  is  frequently  called 
the  excise  tax.  Until  a  few  years  ago  the  significance  of 
Federal  revenues  was  almost  synonymous  with  customs 
duties  and  excise  taxes.  The  scope  of  Federal  revenues 
has  been  extended,  however,  in  spite  of  the  constitutional 
limitation  as  to  the  levy  of  direct  taxes,  until  nearly  all 
the  sources  of  revenue  which  are  used  by  the  states  must 
also  be  considered  as  a  part  of  the  Federal  fiscal  system. 
It  is  only  in  recent  years  that  the  Federal  government  has 

1  There  is  no  logical  relation  between  capitation  taxes  and  excise  or 
business  taxes.  They  are  the  remnant  of  an  earlier  fiscal  system,  and  the 
brief  consideration  which  they  warrant  is  inserted  in  this  chapter. 


EXCISE,  CAPITATION,  AND  BUSINESS  TAXES      203 

levied  taxes  upon  corporations  and  incomes,  and  it  is  more 
than  likely  that  the  emergency  use  of  the  inheritance  tax 
during  the  war  will  remain  a  part  of  the  Federal  source  of 
revenue. 

Because  of  constitutional  restrictions,  and  because  of 
the  peculiar  adaptability  of  some  kinds  of  taxes  to  the  use 
of  the  different  political  units,  it  is  not  to  be  expected 
that  the  different  governmental  units  will  derive  their 
revenue  from  exactly  the  same  sources.  It  will  be  true, 
however,  that  the  overlapping  of  the  sources  of  revenue 
will  be  more  extensive  in  the  future  than  it  has  been  in  the 
past. 

The  breakdown  of  such  sources  of  revenue  as  the  capi- 
tation taxes,  and  the  continual  increase  in  the  pressure 
for  additional  funds,  has  led  to  the  inclusion  of  new 
sources  of  revenue.  One  of  the  most  important  of  these 
in  the  states  and  minor  political  divisions,  is  the  use  of 
licenses  and  business  taxes.  In  this  chapter  consideration 
will  be  given  to  the  excise  tax,  the  capitation  tax,  and 
business  and  license  taxes. 

113.  Excise  Duties  Are  Taxes  upon  Consumption. — 
Present  excise  taxes  have,  to  a  large  extent,  replaced  what 
were  once  called  direct  taxes  upon  consumption.  By  the 
expression  "  direct  consumption  taxes "  was  meant  that 
the  tax  was  placed  upon  the  consumer  of  the  commodity 
which  was  the  basis  of  the  tax.  The  use  of  this  form  of 
tax  has  existed  from  the  beginning  of  revenue  systems. 
The  exaction  of  a  share  of  the  commodities  which  were 
produced  somewhat  resembled  this  form  of  levy.  Later 
the  taxes  were  levied  upon  particular  classes  of  goods 
more  with  the  idea  of  discouraging  their  use  than  with  the 
hope  of  securing  revenue.  Had  revenue  been  the  primary 
object,  the  articles  chosen  would  have  been  in  the  class  of 
necessities  instead  of  luxuries,  as  was  usually  the  case. 

The  goods  most  commonly  taxed  were  plate,  furniture, 
horses,  dogs,  and  servants;  later  houses  were  put  in  tne 
same  category.  While  levies  on  houses  were  regarded  as 


204  OUTLINES  OF  PUBLIC  FINANCE 

consumption  taxes,  they  perhaps  more  nearly  corresponded 
to  the  modern  concept  of  property  tax.  In  modern  times 
little  use  is  made  of  this  system,  yet  all  are  familiar 
with  some  close  approximations  which  were  used  during 
and  after  the  Great  War.  The  tax  which  the  purchaser 
was  compelled  to  pay  on  theater  tickets,  railroad  tickets, 
automobiles,  and  on  many  articles  of  wearing  apparel 
which  retailed  for  more  than  a  certain  amount,  are  well 
known  examples.  A  large  class  of  commodities  which 
were  regarded  as  luxuries  also  were  subject  to  the  tax. 

Modern  Excise  Taxes. — This  class  of  taxes  has  been  re- 
placed, to  a  large  extent,  by  the  modern  excise  tax  which 
is  levied  upon  the  commodity  in  some  stage  of  its  produc- 
tion before  it  reaches  the  consumer.  While  the  burden 
may  be  as  heavy,  it  does  not  raise  so  much  opposition, 
since  the  consumer  does  not  realize  that  a  tax  is  being 
paid.  From  the  administrative  standpoint,  also,  the  mod- 
ern excise  tax  is  more  desirable.  Before  the  industrial 
revolution  the  majority  of  articles  were  domestically  pro- 
duced and  consumed,  and  there  was  but  the  one  place 
to  levy  the  tax. 

With  the  development  of  the  factory  system  of  produc- 
tion, however,  the  advantages  of  using  the  more  indirect 
method  of  levying  taxes  upon  commodities  forced  itself 
upon  the  attention  of  fiscal  authorities.  It  is  compara- 
tively easy,  for  example,  to  place  a  tax  upon  one  million 
articles  at  the  place  where  they  are  produced,  while  it 
would  be  a  task  of  no  small  proportions  to  collect  it  from 
each  of  the  ultimate  consumers.  Where  the  direct  con- 
sumption tax  is  used,  moreover,  because  of  administrative 
difficulties,  it  must  be  limited  to  a  comparatively  small 
list  of  objects,  which  usually  have  been  luxuries.  The 
demand  for  this  class  of  goods  is  comparatively  elastic, 
and  a  tax  would  drive  the  consumer  to  use  substitutes — 
a  feature  which  destroys  the  adaptability  for  fiscal 
purposes. 

Shifting  and  Incidence. — The  adoption  of  the  excise 


EXCISE,  CAPITATION,  AND  BUSINESS  TAXES      205 

method  of  levy,  however,  does  not  destroy  the  fact  that 
the  taxes  upon  commodities,  wherever  levied  in  the  proc- 
ess of  production,  are  usually  burdens  upon  the  consumers 
of  the  goods.  Whether  the  tax  will  be  shifted  to  its  full 
amount  will  depend  upon  the  principles  which  govern  the 
shifting  and  incidence  of  taxes.  A  review  of  these  princi- 
ples, which  were  discussed  in  the  chapter  on  "The  Shifting 
and  Incidence  of  Taxes, "  will  be  of  benefit  here. 

The  particular  phase  of  shifting  and  incidence  which  is 
applicable  to  the  present  situation  is  the  relative  elas- 
ticity of  supply  and  demand  in  the  case  of  the  taxed  good. 
It  may  be  possible,  in  the  process  of  readjustment  follow- 
ing the  imposition  of  a  tax,  that  the  retail  price  of  the 
commodity  may  not  be  raised  by  the  amount  of  the  tax, 
or  may  not  be  changed  at  all,  if  the  supply  be  inelastic 
and  the  demand  elastic.  The  current  assumption,  how- 
ever, that  taxes  on  commodities  will  be  shifted  to  the  con- 
sumer, is  likely  to  be  largely  true.  In  the  final  result  of 
the  burden  there  may  be  little  difference  whether  the  tax 
be  laid  directly  or  indirectly — in  either  case  the  burden  of 
a  tax  on  commodities  of  consumption  will  usually  rest  on 
the  consumer. 

114.  The  Use  of  Excise  Taxes  Presents  Various  Prob- 
lems.— In  framing  and  administering  a  system  of  excise 
taxes,  a  number  of  difficulties  present  themselves.  Not 
least  among  these  is  the  problem  of  making  the  taxes 
conform  to  the  principles  of  justice  in  taxation.  The  old 
diffusion  theory  held  that  any  tax,  if  left  in  the  fiscal  sys- 
tem long  enough,  would  finally  become  so  diffused  and 
broken  up  that  it  would  fall  with  practically  an  equal 
burden  upon  the  whole  of  society.  If  this  were  true  the 
only  thing  necessary  to  justify  excise  taxes  would  be  to 
leave  them  till  their  burden  became  generally  diffused.  It 
is  largely  from  this  reasoning  that  the  dictum,  an  old  tax 
is  a  just  tax,  arises. 

A  moment's  reflection,  however,  will  show  the  fallacy 
of  the  above  conjectures.  Suppose  a  tax  be  placed  upon 


206  OUTLINES  OF  PUBLIC  FINANCE 

one  particular  commodity — tobacco,  for  instance,  and  on 
no  others.  It  is  difficult  to  see  how,  no  matter  how  long 
the  tax  remained  in  force,  it  would  place  a  burden  of 
any  moment  on  others  than  those  who  were  connected 
in  some  way  with  the  production  or  consumption  of 
tobacco.  To  argue  that  such  taxes  conform  to  justice  is 
to  affirm  that  the  amount  spent  is  the  best  measure  of 
taxpaying  ability.  Yet  there  is  little  relationship  between 
what  a  person  spends  and  his  ability  to  bear  burdens. 
One  man  may  have  a  large  family  and  it  will  be  necessary 
for  him  to  spend  his  entire  income  to  provide  them  with 
necessities,  without  any  added  tax  burden,  while  another 
man  with  the  same  means  may  have  no  family  to  support. 
Each  may  spend  the  same  amount,  yet  their  taxpaying 
ability  be  entirely  different. 

Classes  of  Goods  Taxed. — The  articles  upon  which  the  tax 
shall  be  levied  are  an  important  consideration  in  connection 
with  excise  taxes.  In  the  earlier  development  of  this  form 
of  revenue,  attempts  were  made  to  place  the  tax  upon 
every  class  of  commodities,  so  that  equality  of  burden 
might  be  secured.  It  was  even  considered  by  many  that 
this  form  of  revenue  should  replace  all  other  forms.  Such 
a  multiplicity  of  tax  bases,  especially  in  modern  times, 
would  present  such  a  detail  and  expense  of  administra- 
tion, and  be  so  prejudicial  to  the  peace  of  mind  of  indus- 
try and  individuals  that  even  to  suggest  such  a  policy  is  to 
augur  defeat. 

Since,  then,  some  selection  must  be  made  in  the  number 
and  kind  of  articles  upon  which  the  tax  is  to  be  levied,  the 
choice  of  the  items  becomes  a  problem  of  first  importance. 
The  amount  of  revenue  expected  to  be  secured  from  this 
source,  together  with  the  other  taxes  which  are  in  use, 
with  their  incidence,  must  be  considered.  If  a  large 
amount  of  revenue  is  anticipated  the  tax  must  be  levied 
upon  a  different  class  of  commodities  than  if  only  a  small 
amount  is  to  be  secured. 

From  the  standpoint  of  justice  excise  taxes  should  not 


EXCISE,  CAPITATION,  AND  BUSINESS  TAXES      207 

be  levied  upon  articles  which  would  place  an  undue  bur- 
den upon  a  class  of  people  that  is  particularly  hard  hit  by 
other  taxes.  It  may  be  considered  either  that  all  should 
have  an  exemption  equal  to  a  minimum  of  subsistence,  or, 
on  the  other  hand,  that  every  citizen  should  contribute 
to  the  support  of  the  state. 

The  articles  upon  which  an  excise  tax  would  be  placed 
would  differ  according  to  the  principle  adhered  to.  If  it 
be  deemed  wise  to  exempt  a  fixed  minimum,  then  no  tax 
should  be  placed  upon  such  necessities  as  salt,  sugar, 
flour,  and  other  articles  in  the  class  of  necessities;  if,  on 
the  other  hand,  it  be  held  that  all  should  contribute  some- 
thing to  the  state,  no  surer  method  of  accomplishing  this 
can  be  devised  than  by  placing  a  tax  upon  such  articles 
as  those  just  mentioned.  If  the  idea  be  to  make  excise 
taxes  provide  a  sort  of  progressive  element  to  the  tax 
system,  then  the  levy  will  be  upon  objects  which  enter 
primarily  into  the  purchases  of  the  richer  classes.  If  the 
primary  object  be  to  secure  revenue,  with  no  consideration 
as  to  the  justice  of  the  incidence,  then  the  objects  chosen 
for  the  levy  would  be  the  class  of  goods  which  are  con- 
sidered as  necessities  by  the  large  middle  class  of  citizens. 

In  the  determination  of  the  rate,  where  the  yield  of 
revenue  is  the  prime  consideration,  much  attention  will 
have  to  be  directed  to  the  elasticity  of  the  demand  for 
the  various  bases  of  the  tax.  The  actual  results  from  ex- 
cise taxes,  therefore,  because  of  the  many  more  or  less 
indeterminate  factors  connected  with  them,  may  vary 
greatly  from  the  anticipations  which  were  in  mind  at  the 
time  of  levy. 

115.  Excise  Taxes  May  Have  Industrial  and  Social 
Effects. — The  use  of  excise  taxes,  aside  from  any  fiscal 
considerations,  may  have  intentional  or  unintentional 
effects  upon  industrial  and  social  activities.  Obviously, 
these  effects  cannot  be  accurately  measured,  perhaps  in 
no  instance,  but  this  does  not  destroy  the  fact  that  these 
results  exist. 

14 


208  OUTLINES  OF  PUBLIC  FINANCE 

May  Counteract  Protective  Tariff. — One  use  which  can 
be  made  of  the  tax  is  to  offset  the  effects  which  may  be 
caused  by  other  parts  of  a  fiscal  system.  A  good  example 
of  this  function  is  the  concurrent  use  of  customs  duties 
and  excise  taxes  which  sometimes  occurs.  Take,  for  ex- 
ample, the  case  of  a  country  which  wishes  to  levy  an 
import  duty  upon  a  class  of  goods  which  is  being  pro- 
duced under  competitive  conditions,  both  at  home  and 
abroad — a  feature  which  it  is  desired  to  continue.  The 
levy  of  the  import  duty  would  afford  protection  to  the 
home  producer  unless  some  equalizing  burden  be  placed 
upon  his  product.  The  excise  tax  can  be  made  to  fill 
such  a  need. 

Suppose  the  commodity  in  question  be  sugar,  which  is 
being  produced  in  each  of  two  countries  at  about  the  same 
degree  of  advantage.  One  country  levies  a  tax  of  two 
cents  a  pound  upon  the  product  from  the  other  country, 
which  is  such  a  handicap  that  no  sugar  is  imported,  the 
home  producers  have  a  monopoly  of  the  situation,  the 
price  of  sugar  will  go  up,  and  the  government  will  get  no 
revenue.  An  excise  tax,  however,  of  two  cents  a  pound 
on  sugar  produced  at  home  will  place  an  entirely  different 
aspect  on  the  situation.  No  advantage  will  be  given  to 
either  home  or  foreign  producer  because  of  the  tax  levies, 
and  the  government  will  get  two  cents  a  pound  from  all 
sugar  consumed. 

May  Affect  Progress. — Care  should  be  taken  in  placing 
excise  duties  not  to  interfere  with  the  natural  progress  of 
industry.  In  order  to  prevent  fraud  and  evasion,  govern- 
ment regulation  of  the  production  of  taxed  commodities 
may  be  necessary.  This  regulation  may  be  of  such  a 
nature  as  to  check  invention  and  hinder  the  adoption  of 
more  effective  processes  of  production,  and  society  may 
suffer  more  than  enough  to  compensate  for  the  revenue 
which  was  gained  by  the  state. 

The  indirect  effect  of  excise  taxes  upon  industry  may 
also  vary  greatly.  If  the  tax  be  levied  upon  articles  which 


EXCISE,  CAPITATION,  AND  BUSINESS  TAXES      209 

are  the  basic  products  for  industry  in  general,  the  effect 
will  be  much  more  widely  felt  than  if  the  levy  be  upon 
articles  which  have  little  connection  with  industry.  The 
effects  of  a  heavy  excise  tax  upon  the  production  of  iron 
ore,  for  example,  would  be  felt  by  nearly  all  industries, 
while  a  tax  upon  such  an  article  as  coffee  would  have 
indirect  effects  of  little  significance.  The  taxation  of 
productive  materials,  such  as  iron,  presents  problems 
which  are  not  found  in  connection  with  the  taxing  of  con- 
sumers' goods.  To  place  an  estimate  upon  the  real  effects 
of  the  duties  is  very  much  more  difficult  because  of  the 
many  processes  of  shifting  which  are  likely  to  occur.  The 
ultimate  burden  on  the  consumer  is  likely  to  be  greater, 
moreover,  because  the  tax  has  been  advanced  very  early 
in  the  stage  of  production,  and  the  individual  who  has 
made  the  payment  will  seek  a  rise  in  price  great  enough 
to  repay  him  for  having  waited  to  collect  the  tax  from  the 
consumer. 

Sumptuary  Taxes. — The  primary  purpose  for  the  levy 
of  excise  taxes  is  often  sumptuary.  The  desire  to  limit 
the  consumption  of  commodities  which  are  considered 
harmful  has  led  to  their  being  taxed,  at  varying  rates, 
with  the  expectation  that  the  increased  price  would  lessen 
the  demand.  The  fiscal  aspect  is  overshadowed  in  these 
cases  by  the  expected  beneficial  effects  on  the  moral  and 
social  uplift  of  the  community.  The  most  common  exam- 
ple of  this  class  of  excises  has  been  found  in  connection 
with  intoxicating  liquors,  tobacco,  patent  medicines,  play- 
ing cards,  and  similar  articles.  The  diminution  in  con- 
sumption, however,  has  not  always  been  what  was  antici- 
pated, and  the  anticipated  results  have  often  been  de- 
feated by  the  adulteration  of  the  product,  so  that  a  less 
desirable  commodity  is  disposed  of  at  the  former  price. 
The  use  of  the  excise  tax  as  a  sumptuary  measure  has 
not  been  entirely  satisfactory. 

Care  must  be  taken,  in  formulating  the  excise  system, 
to  make  evasion  difficult,  or  at  least  not  to  make  it  profit- 


210  OUTLINES  OF  PUBLIC  FINANCE 

able.  Evasion  is  likely  to  arise  when  the  attempt  is  made 
to  tax  luxuries  in  proportion  to  their  value.  The  tempta- 
tion is  at  once  given  for  undervaluation  of  the  products, 
which  not  only  defeats  the  purpose  of  the  tax,  but  has  a 
demoralizing  effect  upon  the  citizen.  The  less  the  incen- 
tive to  fraud  and  evasion,  therefore,  the  more  salutary 
will  be  the  social  and  moral  effects  of  excise  taxes. 

116.  Different  Methods  Are  Used  in  Levying  Excise 
Taxes. — The  original  levy  of  the  excise  tax  may  be  made 
in  different  ways,  even  though  the  burden  is  expected  to 
rest  upon  the  final  consumer  of  the  product.  These  ways 
may  be  divided  into  two  general  classes:  a  license  fee  or 
tax  is  imposed  upon  either  the  producer  or  seller  of  the 
commodity,  or  the  tax  is  levied  against  each  unit  of  the 
article.  These  methods  may  be  used  singly  or  in  com- 
bination. In  the  United  States  the  license  taxes  are  col- 
lected by  means  of  stamps  or  licenses  which  must  be  con- 
spicuously displayed  in  the  place  of  business.  The  pur- 
chase of  the  license  is  a  transaction  which  is  necessary 
before  the  conduct  of  the  business  becomes  legal.  Severe 
penalties  are  liable  to  be  inflicted  in  cases  of  default.  All 
persons  who  are  subject  to  the  tax  must  register  with  the 
internal  revenue  collector  of  the  district  in  which  he  is 
located,  and  furnish  specific  information  of  various  kinds 
in  regard  to  his  business.  The  tax  is  a  graduated  one,  and 
the  rates  before  the  Great  War  ranged  from  $600  on  the 
manufacturers  of  oleomargarine  to  $20  on  the  retailers  of 
malt  liquors.  The  dealers  in  tobacco  were  formerly  re- 
quired to  pay  a  license,  but  this  stipulation  was  repealed 
in  1890. 

Tax  upon  Units  of  Goods. — The  levy  of  a  tax  upon  the 
units  of  goods  produced  is  far  more  important  than  the 
levy  upon  producers  and  dealers.  This,  in  fact,  consti- 
tutes the  real  internal  revenue  system,  while  the  license 
taxes  are  merely  auxiliary  measures.  In  the  case  of  the 
levy  upon  the  commodity  the  payment  of  the  tax  is  usu- 
ally required  from  the  manufacturer,  for  it  is  here  that 


EXCISE,  CAPITATION,  AND  BUSINESS  TAXES      211 

the  goods  are  concentrated,  and  hence  the  administrative 
work  is  reduced  to  a  minimum.  The  most  common 
method  of  collecting  this  form  of  tax  is  from  the  sale  of 
stamps.  These  are  canceled  by  the  proper  official,  and 
wherever  possible  are  affixed  to  the  package  containing 
the  goods  in  such  a  way  that  the  stamp  will  be  broken 
upon  opening  the  package.  The  failure  of  a  package  to 
bear  a  stamp  is  evidence  that  the  tax  has  not  been  paid, 
and  constitutes  a  basis  for  prosecution.  Where  the  stamp 
cannot  be  affixed  to  the  article,  it  is  required  to  be  con- 
spicuously posted  hi  the  place  of  business.  Some  fraud 
has  come  from  the  re-use  of  stamps,  but  this  has  been 
reduced  to  a  minimum. 

Commodities  Taxed. — The  principal  commodities  upon 
which  the  excise  tax  has  been  levied  in  the  United  States 
are  distilled  and  fermented  liquors,  tobacco,  oleomarga- 
rine, playing  cards,  and  patent  medicines.  In  times  of 
emergency,  such  as  a  war,  this  list  has  been  greatly  ex- 
tended. Cigars  and  cigarettes  are  graded  both  as  to  weight 
and  value,  while  the  tax  on  the  other  commodities  ranges 
according  to  quantity.  In  countries  other  than  the 
United  States,  excise  taxes  have  been  placed  upon  such 
articles  as  sugar,  silk,  chocolate,  and  salt.  Salt  was  for- 
merly extensively  used  as  a  basis  for  taxes,  and  collection 
was  made  in  the  form  of  licenses  upon  producers  and  dis- 
tributors, or  by  the  granting  or  maintenance  of  a  mo- 
nopoly. The  tax  was  productive,  but  unjust,  because  it 
fell  with  about  the  same  weight  upon  all  classes  of  individ- 
uals, no  matter  what  their  ability  to  meet  the  burden. 
The  use  of  salt,  consequently,  as  a  basis  for  taxes,  has  been 
generally  discarded.  The  principal  bases  for  the  modern 
excise  tax  the  world  over  are  liquors  and  tobacco,  and  the 
motive  behind  the  levy  is  frequently  sumptuary  as  well 
as  fiscal. 

117.  Excise  Taxes  Will  Continue  to  Form  a  Part  of 
Fiscal  Systems. — The  adoption  of  any  new  plan  for  rais- 
ing revenue  has  usually  met  with  numerous  objections, 


212  OUTLINES  OF  PUBLIC  FINANCE 

and  the  introduction  of  the  excise  tax  did  not  escape.  Its 
introduction  in  England  was  severely  criticized,  while,  as 
will  be  later  explained,  its  early  use  in  the  United  States 
met  with  serious  objection.  But  "  an  old  tax  is  a  good  tax  " 
is  now  applicable  to  the  excise  tax  in  so  far  as  the  people 
have  become  used  to  it,  and  the  administrative  machineiy 
has  become  so  perfected  as  to  do  away  with  many  of  the 
earlier  objections  of  inquisitorial  processes,  fraud,  and  eva- 
sions. The  tax  has  come  to  represent  a  sort  of  silent  flow 
of  revenue  to  the  treasury,  with  no  one  feeling  any  par- 
ticular burden,  and  hence  raising  no  complaints. 

The  amount  of  funds  which  accrues  from  the  excise  tax 
in  the  United  States,  at  least,  is  as  large  as  from  any  other 
source,  and  because  of  the  efficient  administrative  ma- 
chinery which  has  been  developed,  the  expense  of  collect- 
ing the  returns  is  comparatively  low.  With  the  machinery 
in  existence,  this  form  of  tax  can  be  made  to  respond 
rather  quickly  and  satisfactorily  to  increased  fiscal  needs, 
either  by  increasing  the  duties  upon  articles  already  taxed, 
or  by  placing  additional  commodities  upon  the  taxable 
list.  This  was  illustrated  by  the  wide  use,  not  only  of 
excise  taxes,  but  of  the  direct  consumption  taxes  during 
the  Great  War. 

It  may  be  difficult  to  square  a  tax  upon  the  articles  of 
consumption  with  the  ideals  of  justice,  yet  a  tax  so  pro- 
ductive as  the  excise  tax  finds  little  difficulty  in  squaring 
itself  with  fiscal  authorities.  Its  use  has  been  made  easier 
and  more  uniform  because  of  the  dissemination  of  large- 
scale  production  throughout  the  principal  nations  of  the 
world,  and  the  increasing  uniformity  in  the  demands  of 
individuals.  But  even  though  excise  taxes  are  produc- 
tive, inexpensive,  and  meet  with  comparatively  little  ob- 
jection— three  desirable  qualities  of  a  revenue  system- 
yet  too  much  reliance  should  not  be  placed  upon  them  or 
their  legitimate  place  will  be  destroyed. 

It  must  always  be  kept  in  mind  that  consumption  does 
not  represent  ability.  An  extensive  use  of  taxes  placed 


EXCISE,  CAPITATION,  AND  BUSINESS  TAXES      213 

upon  necessities,  while  it  would  doubtless  be  productive 
of  much  revenue,  would  be  so  extremely  regressive  as  to 
discredit  its  place  in  a  fiscal  program.  The  future  use  of 
the  excise,  instead  of  expanding  to  all  articles  of  consump- 
tion, as  was  formerly  extensively  advocated,  will  likely  be 
limited  to  comparatively  few  goods,  and  these  will  be  in 
the  class  of  semiluxuries  and  luxuries,  rather  than  in  the 
class  of  necessities.  The  class  of  commodities  chosen, 
moreover,  will  likely  consist,  to  some  extent,  of  those  of 
which  a  diminution  in  use,  because  of  the  tax,  would  not 
be  considered  undesirable.  While,  under  ordinary  con- 
ditions, no  levies  will  be  made  upon  necessities,  yet  large 
returns  will  continue  to  be  received  from  the  class  of  semi- 
luxuries  whose  use  is  largely  a  matter  of  fixed  habit. 

118.  The  United  States  Has  Effective  Machinery  for 
Administering  Excises. — The  machinery  for  handling  the 
collection  of  the  internal  revenue  for  a  country  as  large  as 
the  United  States  must  necessarily  be  extensive.  Since 
the  additional  duties  of  assessing  and  collecting  the  Federal 
income  and  excess  profits  taxes  has  been  added  to  the 
duties  of  the  internal  revenue  department,  a  partial  re- 
organization has  been  found  necessary  in  order  to  expedite 
the  large  amount  of  business  which  it  is  necessary  to 
handle. 

Central  Machinery. — The  Bureau  of  Internal  Revenue, 
which  has  charge  of  the  collection  of  the  excise  taxes,  as 
well  as  the  income  and  excess  profits  taxes,  is  one  of  the 
divisions  of  the  treasury  department,  under  the  direction 
of  the  Commissioner  of  Internal  Revenues.  The  commis- 
sioner is  directly  responsible  to  the  Secretary  of  the  Treas- 
ury. Two  advisory  boards  are  provided — the  legal  ad- 
visory board,  and  the  excess  profits  advisory  board.  The 
latter  of  these  boards,  as  the  title  indicates,  has  to  do  with 
the  collection  of  excess  profits,  while  the  other,  which  is 
composed  of  lawyers,  must  advise  on  the  legal  situations 
which  arise  in  connection  with  assessments  and  collections. 

The  bureau  is  composed,  at  present,  of  six  divisions, 


214  OUTLINES  OF  PUBLIC  FINANCE 

each  of  which  is  placed  under  a  deputy  commissioner. 
The  first  three  divisions  have  to  do  with  the  regulations 
regarding  the  collection  of  the  taxes,  while  the  fourth  has 
charge  of  their  actual  collection.  The  fifth  division  has 
charge  over  the  inspection  of  returns,  while  the  sixth 
division  is  sometimes  called  the  Division  of  Business  Co- 
operation. It  is  the  function  of  this  division  to  obtain 
as  much  cooperation  as  possible  between  the  business 
interests  of  the  country  and  the  government.  It  has 
worked  with  the  boards  of  trade  and  chambers  of  com- 
merce in  a  campaign  of  education.  This  division  also  looks 
after  the  complaints,  and  invites  suggestions  for  a  greater 
perfection  of  the  administration  of  the  law. 

Local  Machinery. — The  actual  collection  of  the  excise 
taxes  is  handled  by  local  internal  revenue  officers.  The 
United  States  is  divided  into  sixty-four  collection  dis- 
tricts, and  each  is  in  charge  of  an  internal  revenue  col- 
lector. It  is  to  this  officer  that  the  individuals  and  firms 
of  the  district  make  returns  and  pay  taxes.  Returns  are 
always  examined,  and  if  any  serious  errors  occur  may  be 
sent  back  to  be  filled  out  again.  The  list  of  taxes  for  the 
month  are  calculated  and  sent  to  the  Commissioner  of 
Internal  Revenue,  who  in  turn  charges  the  local  official 
with  the  amount  of  the  tax,  and  makes  him  responsible 
for  its  collection.  The  local  collector  is  expected  to  detect 
fraudulent  returns,  or  to  know  that  a  return  should  have 
been  filed,  but  was  not,  and  to  take  proper  steps  to  make 
rectifications.  Even  after  the  reports  are  turned  in  to  the 
department,  evidences  of  fraud  or  mistakes  may  be  found, 
in  which  case  an  abstract  is  made  and  turned  over  to  the 
field  force  of  investigators  in  the  proper  district.  These 
investigators  are  expected  to  be  thorough  and  to  ascertain 
the  facts. 

If  taxes  have  been  illegally  assessed  or  collected  a  claim 
may  be  presented  on  an  authorized  form.  The  entire 
burden  of  proof  rests  on  the  claimant,  and  if  his  case  is 
established,  reimbursement  may  be  secured  through  the 


EXCISE,  CAPITATION,  AND  BUSINESS  TAXES      215 

revenue  office  of  the  district.  The  efficient  machinery 
which  has  been  developed  is  helping  to  make  the  internal 
revenue  sj^stem,  with  its  multitude  of  added  burdens,  a 
successful  part  of  the  fiscal  program  of  the  United  States. 

119.  The  United  States  Did  Not  Use  Excises  Exten- 
sively Before  the  Civil  War. — The  constitutional  grant  to 
the  Federal  government  of  the  power  to  levy  internal 
revenue  duties  was  the  cause  for  much  objection.  All 
sorts  of  evil  consequences  were  pictured,  such  as  the  entire 
confiscation  of  property  and  imprisonment  of  individuals. 
Officials,  consequently,  were  somewhat  slow  and  cautious 
in  extending  the  fiscal  system  to  make  use  of  internal 
taxes,  and  when  it  was  attempted  much  opposition  arose, 
both  within  and  without  Congress. 

The  failure  of  the  import  duties  to  supply  sufficient 
funds,  led  Hamilton,  the  Secretary  of  the  Treasury,  to 
recommend  the  adoption  of  an  excise  tax,  especially  on 
whisky.  Congress  was  not  anxious  to  create  the  new 
Federal  offices  which  the  tax  would  make  necessary,  while 
in  some  par,ts  of  the  country  strenuous  objection  arose  to 
the  use  of  whisky  as  the  base  of  the  tax.  It  was  consid- 
ered so  much  of  a  necessity  as  to  make  the  tax  in  the 
nature  of  a  poll  tax,  which,  therefore,  fell  with  an  unequal 
burden  upon  different  classes  of  people.  The  tax  was 
adopted,  however,  and  imposed  a  duty  of  from  eleven  to 
thirty  cents  a  gallon  on  spirits  manufactured  from  foreign 
materials,  and  from  nine  to  twenty-five  cents  a  gallon  on 
spirits  from  domestic  materials.  The  opposition  which 
arose,  and  which  culminated  in  armed  resistance  in 
western  Pennsylvania,  known  as  the  Whisky  Rebellion,  is 
familiar  to  students  of  American  history.  The  unproduc- 
tiveness of  this  tax  led  to  an  extension  of  excise  duties 
upon  carriages,  sales  of  liquor,  manufacture  of  snuff, 
sugar,  and  auction  sales. 

Early  Tax  Repealed. — This  initial  employment  of  the 
excise  principle  as  an  integral  part  of  the  Federal  fiscal 
system  was  of  short  duration.  The  political  party  which 


21(5  OUTLINES  OF  PUBLIC  FINANCE 

came  into  power  at  the  beginning  of  the  nineteenth  cen- 
tury believed  in  simplifying  the  administrative  machinery 
to  the  greatest  possible  extent,  and,  furthermore,  that  the 
use  of  excise  taxes  violated  the  principles  of  democratic 
freedom.  The  chairman  of  the  Committee  on  Ways  and 
Means  of  the  House  of  Representatives,  under  the  new 
political  regime,  hastened  to  recommend  the  abolition  of 
excise  taxes  on  the  ground  that  they  increased  the  number 
of  officers  and  placed  increased  burdens  on  the  people. 
He  contended,  also,  that  they  were  obnoxious,  vexatious, 
and  hostile  to  the  genius  of  a  free  people,  and  at  the  same 
time  were  expensive  to  collect. 

The  opposition  contended  that  if  reduction  of  duties 
were  to  be  made  it  should  come  from  the  import  taxes  on 
such  necessities  as  tea,  sugar,  and  similar  commodities, 
rather  than  from  such  a  luxury  as  distilled  spirits.  A 
strong  argument  was  further  made  for  the  retention  of  the 
fiscal  administrative  machinery  which  had  been  estab- 
lished. These  considerations  were  of  no  avail,  however, 
and  the  repeal  measure  passed  in  1802. 

Emergency  Use  of  Tax. — The  burden  of  the  War  of  1812 
came  upon  the  treasury,  the  returns  from  imports  fell  off, 
and  no  excise  taxes  were  in  existence.  Much  discussion 
occurred  in  Congress  over  the  reestablishment  of  excises, 
but  no  agreement  could  be  reached.  In  a  special  session 
in  1813,  Congress  levied  light  duties  upon  liquors,  sugar, 
carriages,  and  auctions,  as  well  as  some  stamp  duties. 
These  proved  insufficient,  and  in  1814  the  rates  were 
raised  and  the  duties  extended  to  a  few  other  commodities. 
The  administrative  machinery  was  so  ineffective,  however, 
that  the  returns  were  slow  in  coming  in — many  of  the 
taxes  were  not  collected  until  years  after  they  were  due. 
The  war  was  scarcely  over  when  strong  agitation  arose 
for  the  removal  of  the  burden  of  the  excise  taxes.  They 
continued  to  be  used  to  some  extent  until  1817,  after 
which,  except  for  the  payment  of  some  duties  which  had 
previously  accrued,  they  ceased  to  have  any  place  in  the 


EXCISE,  CAPITATION,  AND  BUSINESS  TAXES      217 

revenue  systam  of  the  country  until  war  again  called  them 
forth. 

120.  Some  Civil  War  Excises  Have  Been  Permanently 
Retained. — No  attempt  was  made  to  secure  any  adequate 
revenue  from  taxes  during  the  first  months  of  the  Civil 
War.  It  was  the  policy  of  the  Secretary  of  the  Treasury 
to  rely  principally  upon  borrowed  funds  to  meet  the 
emergency  needs.  In  spite  of  this  policy  of  Secretary 
Chase,  Congress,  in  1862,  determined  to  extend  the  use 
of  taxes,  and  an  adoption  of  a  system  of  internal  revenue 
duties  was  a  part  of  the  plan.  The  problem  of  getting  a 
workable  system  was,  of  course,  much  more  complex  than 
when  excises  had  previously  been  used  during  the  War  of 
1812.  The  territory  as  well  as  the  population  was  greatly 
extended,  while  industry  had  become  greatly  diversified 
during  this  lapse  of  forty-five  years. 

To  inaugurate  a  successful  system  of  excises  under  these 
conditions,  an  extensive  administrative  machinery  was 
necessary,  and  this,  of  course,  did  not  exist.  With  the  hope 
that  little  attempt  would  be  made  to  evade  the  tax,  it 
was  decided  to  place  low  duties  upon  a  large  number  of 
articles.  The  list  of  taxed  articles  included  liquors,  to- 
bacco, manufactured  products,  carriages,  billiard  tables, 
slaughtered  animals,  means  of  transportation,  and  various 
forms  of  business  organizations.  Taxes  were  also  levied 
upon  incomes  and  legacies.  Besides  these  a  large  number 
of  licenses  were  imposed. 

Tax  of  1864. — The  returns  from  these  levies  were  disap- 
pointing— less  than  one  half  of  the  anticipated  revenue 
4vas  realized — and  Congress  attempted  to  remedy  the 
situation  by  new  legislation  in  1864.  In  general  outlines, 
this  measure  was  much  the  same  as  the  earlier  enactment, 
the  principal  difference  being  a  general  increase  in  rates 
and  an  extension  to  more  commodities.  So  all-inclusive 
was  the  system  that  it  became  impossible  to  tell  how  many 
taxes  many  commodities  were  expected  to  pay.  Nearly 
every  class  of  raw  material  bore  a  tax,  as  well  as  the 


218  OUTLINES  OF  PUBLIC  FINANCE 

finished  product,  while  a  tax  generally  was  placed  upon 
transportation  and  sale.  While  the  burdens  inflicted  were 
often  inequitable,  yet  from  the  fiscal  standpoint  the  re- 
turns proved  satisfactory.  That  the  administrative  ma- 
chinery had  had  a  chance  to  be  developed  since  the  pas- 
sage of  the  earlier  law,  will  account  in  part  for  the  more 
successful  operation  of  the  law  of  1864. 

Development  Since  the  Civil  War. — A  change  can  be 
noted  in  the  temper  of  the  citizenship  following  the  Civil 
War  from  that  which  was  evidenced  after  the  War  of  1812. 
Less  clamor  was  raised  to  have  the  excise  taxes  removed. 
The  old  selfishness  of  the  states  was  beginning  to  disap- 
pear, and  they  were  beginning  to  view  the  extension  of 
Federal  activities  as  a  lessening  of  the  burden  on  the 
treasuries  of  the  states.  The  expenses  of  the  government 
continued  to  be  high  for  a  number  of  years  after  the  close 
of  the  war,  and  never  did  go  back  to  the  pre-war  level.  It 
needed  little  argument,  then,  to  show  that  the  excise  tax 
should  remain  as  a  fundamental  part  of  the  fiscal  system. 

Changes  were  gradually  made  until  the  tax  applied 
principally  to  tobacco  and  distilled  and  malted  liquors. 
The  rates  on  these  have  varied  somewhat,  but  usually  have 
been  lower  than  in  most  countries.  During  the  Spanish- 
American  War  the  excise  taxes  were  greatly  extended,  and 
the  existing  duties  were  practically  doubled,  so  that  their 
receipts  formed  a  considerable  portion  of  the  total  revenue. 
At  the  end  of  the  war  their  use  was  again  curtailed  to 
practically  the  former  basis,  where  it  remained  until  the 
Great  War.  The  extensive  use  made  of  these  taxes  during 
and  after  the  Great  War  is  familiar  to  all.  Because  of  the 
large  future  revenue  needs  to  meet  interest  and  debt 
charges,  as  well  as  the  rapidly  multiplying  government 
activities,  and  because  of  the  elimination  of  liquors  as  a 
source  of  revenue,  it  is  to  be  expected  that  the  excise  tax 
will  be  continued  on  a  very  much  larger  number  of  com- 
modities than  during  the  pre-war  period. 

121,  Excise  Ites  Have  Important  Places  in  Foreign 


EXCISE,  CAPITATION,  AND  BUSINESS  TAXES     219 

Fiscal  Systems. — It  is  intended  to  do  no  more  than  simply 
indicate  some  of  the  uses  of  excise  taxes  in  countries  other 
than  the  United  States.  As  might  be  expected,  because 
of  their  indirect  nature  they  very  early  held  prominent 
places  in  fiscal  systems.  England  resorted  to  their  use  as 
early  as  the  seventeenth  century  and  gradually  extended 
the  system  until  it  included  such  articles  as  salt,  glass, 
leather,  liquors,  and  many  other  commodities.  Marked 
extension  was  made  of  these  duties  to  supply  war  funds, 
and  after  the  passing  of  the  emergency  they  were  usually 
reduced  to  something  like  the  former  level. 

As  the  country  developed  and  the  fiscal  machinery 
became  better  organized,  the  multiplicity  of  the  duties 
lost  popularity,  and  from  the  first  quarter  to  the  middle 
of  the  nineteenth  century  many  commodities  which  had 
long  been  burdened  by  taxes  were  relieved.  Among  these 
were  glass,  brick,  tile,  leather,  and  soap.  The  removal  of 
many  of  these  duties  had  a  stimulating  effect  upon  indus- 
try. The  duties,  however,  have  been  retained  on  the 
various  kinds  of  alcoholic  liquors,  the  brewing  and  dis- 
tilling of  which  are  kept  under  close  government  super- 
vision. Licenses  are  also  charged  for  the  sale  of  these 
liquors.  The  results  of  an  excise  on  tobacco  have  been 
accomplished  through  the  restriction  of  its  growth  in 
England,  and  taxing  it  through  the  use  of  the  customs 
duty. 

Excise  Tax  in  France. — The  most  extensive  use  of  ex- 
cise taxes  has  been  found  in  France.  They  were  developed 
here  much  earlier  than  in  England  and  have  always  occu- 
pied a  place  of  more  or  less  importance  in  French  fiscal 
history.  They  have  been  far  from  satisfactory  at  times, 
and  have  been  often  in  ill  repute  among  the  citizens  be- 
cause of  bad  administration  and  discriminations.  Their 
importance  to  the  fiscal  system  has  varied  at  different 
times,  but  because  of  the  nature  of  the  government  they 
have  been  used  more  extensively  than  in  most  countries. 
This  is  the  situation  at  present.  A  larga  number  of  com- 


220  OUTLINES  OF  PUBLIC  FINANCE 

modities  are  taxed,  and  various  methods  are  used  in  mak- 
ing the  levy.  A  common  method  is  to  levy  the  tax  upon 
goods  as  they  pass  from  one  political  division  to  another. 
Luxuries  and  semiluxuries  have  formed  the  bases  for  the 
most  of  the  taxes. 

Use  in  Other  Countries. — Italy  has  also  made  extensive 
use  of  excise  taxes,  but  is  distinguished  from  the  other 
countries  in  that  articles  of  necessary  consumption  have 
always  been  made  to  contribute  heavily.  Germany,  also, 
has  long  used  this  form  of  taxes,  though  its  prominence 
has  not  been  so  marked  as  in  some  of  the  other  European 
states.  Some  of  the  effects  have  been  offset  by  the  use  of 
bounties,  while  some  articles  which  were  capable  of  pro- 
ducing much  revenue,  such  as  beer,  have  been  lightly 
taxed.  In  practically  every  country  the  use  of  this  form 
of  tax  occupies  a  place  of  some  degree  of  importance.  In 
nearly  every  case,  moreover,  this  degree  of  importance 
has  been  greatly  increased  since  the  advent  of  the  Great 
War,  and  it  is  doubtful  whether  it  will  ever  recede  to  its 
former  level.  The  articles  which  are  most  universally 
used  as  the  bases  upon  which  to  levy  excise  taxes  are 
liquors,  tobacco,  salt,  and  sugar. 

122.  Government  Industries  May  Have  the  Effect  of 
Excise  Taxes. — It  was  pointed  out  hi  an  earlier  chapter 
that  a  state  may  take  over  and  conduct  an  industry,  and 
that  in  doing  this  it  may  be  impelled  by  any  one  of  several 
motivating  forces.  If  the  thing  which  leads  the  state  to 
enter  industry  be  primarily  fiscal  or  sumptuary,  then  the 
effect  is  much  the  same  as  that  produced  by  the  use  of 
excise  taxes.  As  long  as  the  motivating  force  is  to  give  a 
service  at  the  lowest  possible  cost,  the  situation  is  differ- 
ent. When  Queen  Elizabeth  granted  monopolies  to  par- 
ticular industries  in  return  for  a  payment  to  the  state, 
while  it  was  not  precisely  a  state  industry,  yet  the  effect 
was  much  the  same  as  if  there  had  been  a  levy  upon  the 
articles  produced.  The  plan  of  producing  and  distributing 
intoxicating  liquors  which  is  used  by  some  of  the  smaller 


EXCISE,  CAPITATION,  AND  BUSINESS  TAXES      221 

European  countries,  as  well  as  the  state  dispensary  sys- 
tem, which  was  formerly  used  in  South  Carolina,  are 
examples  of  the  interference  of  governments  in  industry 
for  sumptuary  purposes.  At  present,  in  some  of  the  Euro- 
pean countries,  government  monopolies  are  maintained 
over  particular  industries,  primarily  for  the  purpose  of 
securing  revenues.  Monopolies  of  the  salt  and  match 
industry  are  found,  but  the  best  example  is  the  tobacco 
monopoly,  which  is  found  in  Austria,  Italy,  and  France. 
The  most  systematic  use  of  this  monopoly  is  in  France, 
and  as  an  illustration  of  a  government  monopoly  for 
revenue,  a  brief  examination  will  be  beneficial. 

French  Tobacco  Monopoly. — The  French  tobacco  mo- 
nopoly is  by  no  means  a  new  experiment,  but  was  begun 
nearly  two  hundred  and  fifty  years  ago,  and  has  had  an 
uninterrupted  existence  for  more  than  a  hundred  years. 
The  growth  of  tobacco  is  prohibited  except  in  certain 
districts,  and  here  it  is  only  allowed  by  persons  to  whom 
licenses  have  been  granted.  Painstaking  government  su- 
pervision and  inspection  are  carried  out,  primarily  to  pre- 
vent any  of  the  crop  from  passing  into  other  hands  than 
those  of  the  government.  The  prices  allowed  for  the  crop 
are  determined  by  a  board  of  experts.  The  manufactur- 
ing is  carried  on  in  government  factories,  and  the  selling 
is  done  by  government  officials.  As  a  general  thing  the 
price  has  been  much  higher  for  tobacco  in  France  than  in 
most  other  countries.  It  has  been  so  high,  in  fact,  as  to 
act  to  some  extent  as  a  sumptuary  institution,  yet  even 
with  this  situation  enormous  revenues  are  secured. 

Government  Ownership. — This  is  not  the  place  for  a  dis- 
cussion of  the  merits  or  demerits  of  government  owner- 
ship and  operation  of  industry.  That  it  can  be  used  suc- 
cessfully, both  for  fiscal  and  sumptuary  purposes,  cannot 
be  denied.  This  does  not  mean,  however,  that  the  state 
can  enter  all  fields  of  industry  to  advantage  to  its  citizens. 
While  revenue  may  be  secured,  the  keenness  in  develop- 
ing a  perfected  plant,  and  in  adopting  more  effective  pro- 


222  OUTLINES  OF  PUBLIC  FINANCE 

ductive  processes,  may  be  much  less  than  if  the  plants 
were  competitively  run  by  individuals.  In  such  cases  the 
patrimony  of  the  state  is  impaired,  and  a  greater  burden  is 
placed  upon  posterity  because  their  income  will  not  be  as 
great  as  it  might  have  been.  The  quality  of  materials 
and  services  is  not  always  of  the  highest,  consequently  all 
these  indirect  effects  must  be  weighed  when  a  question  of 
the  state's  entering  industry  is  under  consideration. 

123.  Capitation  Taxes  Are  No  Longer  Important  in  Fis- 
cal Systems. — Capitation  or  poll  taxes  have  never  occu- 
pied a  place  of  importance  in  Federal  revenue  systems, 
yet  they  have  played  a  role  of  more  or  less  importance  in 
some  of  the  states  and  minor  political  divisions.  Their 
importance  is  waning,  however,  and  consequently  this 
source  of  revenue  warrants  but  a  brief  discussion.  In  the 
early  history  of  many  countries  poll  taxes  occupied  the 
place  of  primary  importance  in  fiscal  systems.  The  injustice 
which  comes  from  a  uniform  assessment  upon  individuals 
was  soon  felt,  and  the  tax,  while  still  often  designated  as 
the  poll  tax,  was  graduated  according  to  property,  per- 
sonal rank,  or  some  other  such  evidence  of  ability  to  meet 
burdens.  In  many  cases  the  poll  tax  has  gradually  de- 
veloped into  other  forms  of  taxes  where  an  attempt  is 
made  to  levy  in  accordance  with  the  ability  to  pay.  In  a 
few  foreign  countries,  however,  the  tax  is  still  assessed  at 
a  definite  amount  per  capita. 

In  American  States. — The  most  extensive  use  of  the  poll 
tax  has  been  in  the  American  states.  At  the  beginning  of 
the  present  century  its  use  was  still  found  in  about  half 
of  these  commonwealths.  Its  retention  is  most  general 
in  the  Southern  and  some  of  the  New  England  states. 
Its  use  was  extensive  in  the  Colonies,  and  frequently  the 
entire  amount  of  revenue  was  collected  from  this  source. 
Gradually,  however,  its  importance  as  a  source  of  revenue 
was  replaced  by  other  taxes,  yet  the  payment  of  the  poll 
tax  was  often  retained  as  a  prerequisite  of  certain  political 
privileges,  usually  the  right  of  suffrage.  The  fiscal  irn- 


EXCISE,  CAPITATION,  AND  BUSINESS  TAXES      223 

portance  of  the  tax  throughout  its  history  has  been  small, 
while  frequently  great  importance  has  been  attached  to 
the  other  aspects. 

Objections  to  Poll  Tax. — The  poll  tax  is  the  source  of 
much  corruption  and  little  revenue  in  the  states  where  it 
is  still  retained.  In  many  of  the  Southern  states  the  pay- 
ment of  the  poll  tax  has  been  made  a  prerequisite  to  suf- 
frage, with  the  express  intention  of  limiting  the  number  of 
voters.  This  purpose  often  has  been  worse  than  frus- 
trated by  unscrupulous  politicians,  who  make  a  practice 
of  paying  the  tax  in  return  for  the  support  of  the  voter. 
It  was  the  development  of  this  practice  which  led  many 
of  the  New  England  states  to  give  up  this  qualification 
for  suffrage. 

In  most  states  and  localities  where  the  tax  is  retained 
as  a  fiscal  measure,  it  is  unproductive  of  revenue  because 
no  attempt  is  made  to  administer  it.  The  amount  of 
the  tax  is  so  small  that,  where  it  cannot  be  assessed  and 
collected  in  connection  with  property,  the  administrative 
expense  proves  to  be  a  greater  item  than  the  amount  of 
the  tax  itself.  It  is,  therefore,  easy  to  explain  the  gen- 
eral reports  from  the  various  officials  that  no  attempt 
has  been  made  to  collect  the  tax,  or  that  the  returns  from 
this  source  have  been  insignificant. 

Where  the  tax  is  levied  by  local  governmental  units  it 
is  usually  for  some  specific  purpose,  such  as  schools  or 
roads.  The  old  payment  of  services  is  still  exacted  in 
some  quarters  in  the  form  of  requiring  every  male  citizen 
between  certain  ages  to  execute  a  given  number  of  days' 
labor  on  the  highways.  The  results  are  usually  not  satis- 
factory, and  the  plan  is  gradually  going  into  discard, 
while  the  highways  are  kept  up  by  expenditures  from  the 
general  tax  fund. 

The  outstanding  objections  to  the  modern  use  of  the 
poll  tax  do  not  justify  its  retention  to  anything  like  the 
extent  it  is  still  found  in  the  American  commonwealths. 
It  never  has  been,  and  never  will  be,  a  form  of  taxation 


221  OUTLINES  OF  PUBLIC  FINANCE 

which  is  popular  with  the  citizenship  of  a  country,  conse- 
quently an  extensive  evasion  may  be  expected.  To  be  a 
general  tax,  the  amount  of  the  levy  must  be  small,  and 
because  of  the  administrative  expense  involved,  a  thor- 
ough collection  cannot  be  expected.  The  use  of  the  tax 
as  a  political  prerogative  has  been  the  source  of  so  much 
corruption  as  to  leave  nothing  to  be  said  in  its  favor. 
From  the  fiscal,  political,  and  ethical  points  of  view, 
therefore,  the  poll  tax  is  doomed,  and  its  retention  often 
can  be  explained  only  because  of  the  selfish  designs  of 
political  parties. 

124.  Business  Taxes  Have  Been  Extensively  Developed 
in  France  and  Prussia. — In  these  days  of  excessive  public 
expenditure  and  consequent  demands  for  revenue,  fiscal 
authorities  of  all  political  units  are  anxious  to  discover 
untapped  sources  of  funds,  and,  if  such  are  discovered,  to 
determine  the  most  successful  way  of  making  them  pro- 
ductive. Business  and  license  taxes  are  one  of  these 
sources  which  have  been  used  only  to  a  small  extent  in 
the  United  States,  except  in  certain  sections,  until  com- 
paratively recent  years.  Other  countries  have  preceded 
in  the  use  of  these  taxes,  and  have  worked  out  de- 
tailed systems,  some  of  the  successful  of  which  can  be 
noted  with  profit  by  American  students,  since  this  method 
of  taxation  doubtless  will  be  extensively  used  in  the  future. 

Business  Taxes  in  France. — The  system  of  business 
taxes  which  had  been  worked  out  in  France  before  the 
Great  War  represents,  perhaps,  the  most  thorough  and 
detailed  development  in  fiscal  machinery  of  this  na- 
ture. Only  the  briefest  outline  of  the  plan  will  be  at- 
tempted here.  Certain  definite  principles  are  recognized, 
and  these  are  embodied  in  the  formulation  of  the  sched- 
ules. It  is  assumed,  in  the  beginning,  that  certain  forms 
of  industry  are  more  profitable  than  others;  that  even  in 
the  same  class  of  industry  profits  vary  directly  with  the 
population;  that  the  profits  of  a  manufacturer  or  mer- 
chant will  ordinarily  vary  directly  with  the  size  of  the 


EXCISE,  CAPITATION,  AND  BUSINESS  TAXES      225 

site  which  is  occupied;  and  that  the  kind  of  residence 
which  the  business  man  occupies  is  often  an  indication  of 
his  business  success. 

In  arriving  at  the  tax  assessment,  two  classes  of  rates 
existed — the  fixed  and  proportional.  To  arrive  at  the 
former  three  schedules  were  used.  Schedule  A  includes 
merchants  and  professional  classes.  The  merchants  are 
further  classified  as  to  the  nature  of  the  business,  whether 
it  be  wholesale,  retail,  or  a  combination.  After  the  de- 
termination of  the  kind  of  business,  then  it  must  be  placed 
in  one  of  the  nine  classes  according  to  population.  Sched- 
ule B  includes  bankers,  department  stores,  transfer  com- 
panies, etc.  The  classifications  in  this  group  are  based 
upon  the  population  of  the  town  where  the  business  is 
located  and  upon  the  number  of  persons  employed. 

Industrial  establishments  are  placed  in  Schedule  C. 
Population  is  not  used  as  a  criterion  of  classification  here, 
but  a  fixed  rate  is  levied  upon  each  industry  of  the  same 
kind,  while  a  variable  rate  is  based  upon  the  amount  of 
profits.  In  addition  to  these  schedules  another  tax  is 
assessed,  w^hich  is  based  upon  the  site  value  of  the  resi- 
dence of  the  individual,  together  with  the  value  of  the  site 
used  in  his  business.  Certain  classes,  such  as  lawyers, 
physicians,  and  others  of  a  similar  nature,  are  subject  only 
to  this  latter  tax. 

Tax  in  Prussia. — For  many  years  Prussia  used  a  similar 
method  of  taxing  business  organizations,  but  in  1891  the 
basis  for  classification  was  remodeled.  Population  of  the 
place  in  which  the  business  was  located  was  no  longer 
used  as  a  principle  in  classification,  neither  were  the  in- 
dustries divided  into  classes  because  of  the  nature  of  the 
business.  The  entire  classification,  under  the  revised  plan, 
is  based  upon  the  capital  invested  and  upon  the  annual 
earnings.  The  earnings  are  used  as  the  primary  basis  of 
classification,  with  capital  as  a  modifying  factor,  in  divid- 
ing industries  into  four  classes,  and  the  tax  is  so  graduated 
as  to  take  about  1  per  cent  of  the  earnings. 


226  OUTLINES  OF  PUBLIC  FINANCE 

The  French  system  appears  exceedingly  complex,  but 
does  possess  some  advantages.  The  business  man  or  his 
business  is  subject  to  no  investigation  by  fiscal  officials, 
and  consequently  the  tax  is  not  unpopular.  The  tax, 
moreover,  is  not  upon  actual  earnings,  but  upon  what 
should  be  earned,  ordinarily,  under  given  conditions.  The 
tax  penalty  is  not  upon  the  enterprising  entrepreneur  of  a 
particular  class,  but  upon  the  laggard.  The  necessity  of 
relying  upon  declarations  of  the  taxpayer  is  also  elimi- 
nated. Many  inequalities  doubtless  have  arisen,  yet  the 
advantages  somewhat  compensate  for  them.  The  system 
has  been  productive  and  provided  no  small  part  of  the 
pre-war  revenues. 

125.  Business  and  License  Taxes  May  Be  Extended  by 
American  Fiscal  Authorities. — The  methods  to  be  used  by 
the  different  political  divisions  of  the  United  States  in 
securing  increased  revenues,  has  been  an  important  phase 
of  recent  fiscal  discussion,  and  no  little  attention  has  been 
given  to  the  possibilities  of  business  and  license  taxes. 
It  must  not  be  inferred  from  this,  however,  that  business 
and  license  taxes  have  not  previously  had  a  place  in  our 
fiscal  system.  In  many  of  the  states  they  were  among 
the  early  sources  of  revenue,  and  in  some  of  these  states 
have  had  a  continuous  existence  to  the  present  time.  The 
use  of  the  various  kinds  of  franchise  taxes  upon  corpora- 
tions is,  of  course,  a  tax  upon  business,  which  has  so  in- 
creased in  importance  in  recent  years  as  to  deserve  treat- 
ment in  a  separate  chapter. 

Present  Use  of  Tax. — The  most  extensive  use  of  this 
form  of  revenue  has  been  in  the  Southern  states,  where 
the  rates  have  been  gradually  increased  and  extended  to 
cover  a  wider  range  of  occupations.  Nearly  all  the  states 
have  made  use  of  the  license  payment  for  the  purpose  of 
regulation,  as  in  the  case  of  peddlers,  sale  of  liquor,  etc., 
but  often  the  primary  consideration  was  sumptuary 
rather  than  fiscal.  Yet  in  more  than  one  third  of  the 
states  rates  are  assessed  against  occupations  and  trades, 


EXCISE,  CAPITATION,  AND  BUSINESS  TAXES     227 

primarily  for  the  purpose  of  raising  revenue.  They  are 
frequently  used  by  the  state  and  county  governments, 
but  the  most  extensive  use  of  the  license  tax  has  probably 
occurred  in  municipalities.  These  taxes  are  sometimes 
used  in  connection  with  the  property  tax,  and  sometimes 
in  addition  to  it. 

The  use  of  these  taxes  differs  greatly  in  the  various 
political  units  where  they  are  found  and  generalizations 
are  impossible.  A  few  characteristics,  however,  may  be 
noted.  Manufacturing  plants  are  usually  exempt  from 
the  tax,  while  mercantile  establishments  nearly  always 
have  been  included.  In  many  places  licenses  are  imposed 
upon  the  professional  classes,  but  this  is  not  general. 
Usually  no  classification  or  graduation  has  been  attempted. 
Louisiana  has  been  a  notable  exception  in  this  respect  in 
that  a  rather  extensive  graduation  is  provided.  The  scale 
in  most  cases  is  arranged  on  the  basis  of  sales  or  gross 
earnings,  while  in  some  cases  other  factors  are  considered 
—in  hotels  the  number  of  rentable  rooms,  in  theaters  the 
number  of  seats,  etc.  An  interesting  basis  for  graduation 
which  has  been  used  in  the  Province  of  Ontario  may  be 
noted  here.  Municipalities  may  levy  a  tax  upon  trades 
and  businesses  which  is  to  be  some  percentage  of  the 
assessed  value  of  the  real  estate  occupied  by  the  business. 
Businesses  are  classified  as  to  their  degree  of  profitable- 
ness, and  the  per  cent  that  is  assessed,  based  on  this  de- 
termination, varies  greatly. 

Objections  and  Advantages. — Much  opposition  has  arisen 
to  the  extension  of  the  use  of  business  taxes.  The  objec- 
tion that  such  action  will  repress  industry  was  to  be  ex- 
pected, since  it  is  made  against  every  tax.  The  problem 
of  evasion  has  been,  frequently,  a  serious  one,  but  this 
has  been  because  of  a  lax  administration  rather  than  to 
any  fundamental  defect  in  the  system.  The  objection 
that  this  form  of  taxes  encroaches  upon  the  use  of  the 
property  and  income  tax  is  not  important,  since  a  business 
is  an  entity  distinct  from  its  property  and  from  the  ir^ 


228  OUTLINES  OF  PUBLIC  FINANCE 

comes  of  its  individual  owners.  The  problem  of  valuing 
such  intangibles  as  franchises  and  good  will  would  be  no 
more  difficult  for  this  purpose  than  for  any  other.  Much 
has  been  made  of  the  inequalities  that  would  occur,  espe- 
cially among  competitors,  but  this,  again,  would  be  due, 
not  to  the  system  itself,  but  to  an  improper  classification, 
graduation,  or  administration. 

There  is,  on  the  other  hand,  much  to  be  said  in  favor  of 
the  extension  of  the  use  of  business  and  license  taxes.  One 
of  the  first  considerations  is  the  fiscal  one — they  will  pro- 
duce revenue  quickly,  at  a  low  cost,  and  with  compara- 
tively little  objection.  This  has  been  demonstrated  by 
their  use  not  only  in  this  country,  but  in  other  countries. 
Business,  as  a  unit,  possesses  a  peculiar  ability  to  bear 
burdens  because  of  the  expenditures  the  various  political 
units  have  made  in  its  behalf.  The  Federal  government 
maintains  standard  weights  and  measures,  a  coinage  sys- 
tem, and  regulates  transportation  rates;  the  states  main- 
tain bureaus  of  research  of  various  kinds,  and  the  munic- 
ipalities provide  police,  fire,  and  sanitary  protection. 
Since  business  organizations  do  have  abilities  to  meet 
burdens,  and  since  this  ability  is  greatly  enhanced  by  gov- 
ernmental activities,  it  is  all  the  more  reason  why  busi- 
ness organizations  of  various  kinds — mercantile,  manu- 
facturing, and  others — should  contribute  their  just  share 
to  the  general  public  treasury. 

Use  in  Future. — It  is  probable  that  a  larger  percentage 
of  state  and  local  revenues  will  come  from  these  sources 
in  the  future  than  in  the  past.  In  many  cities  and  states 
the  increase  in  the  returns  has  been  marked.  The  possi- 
bility for  the  increase  in  the  number  of  license  charges,  as 
well  as  an  increase  in  the  revenue  therefrom  is,  in  many 
places,  unbounded.  The  licensing  of  automobiles  by  the 
states,  while  of  some  regulative  value,  has  proved  a  profit- 
able source  of  revenue  and  has  but  suggested  future  pos- 
sibilities. The  state  of  Illinois,  for  example,  with  a  license 
charge  much  lower  than  that  found  in  some  states,  col- 


EXCISE,  CAPITATION,  AND  BUSINESS  TAXES      229 

lected  nearly  five  and  a  quarter  million  dollars  during  the 
first  half  of  the  year  1920.  This  can  also  be  made  a  fruit- 
ful source  of  revenues  for  municipalities,  and  many  have 
begun  to  avail  themselves  of  it.  The  licensing  of  occupa- 
tions has  not  been  carried  to  the  extent  that  it  might  be, 
either  from  the  regulative  or  the  fiscal  point  of  view.  In 
view  of  the  fact  that  some  remunerative  sources  of  rev- 
enue have  been  cut  off,  and  that  expenditures  are  con- 
stantly increasing,  it  may  be  confidently  expected  that 
both  our  states  and  municipalities,  if  not  the  other  politi- 
cal divisions,  will  make  a  more  extended  use  of  business 
and  license  taxes  in  the  future  than  they  have  in  the  past. 

ADDITIONAL  BEADING 

Frederick  C.  Howe,  The  Internal  Revenue  System  of  the 
United  States. 

Proceedings  of  the  National  Tax  Association,  1917,  pp. 
10-19,  185-194. 

H.  E.  Smith,  United  States  Federal  Internal  Tax  History 
from  1861  to  1871. 


CHAPTER  XI 

PROPERTY   TAXES  1 

126.  Taxes  on  Property  Have  Developed  from  Early 
Times. — It  has  been  pointed  out  that  taxes  first  came  into 
use  to  meet  extraordinary  needs  for  funds.  When  their 
use  became  somewhat  general  some  definite  system  of 
levy  became  essential,  and  the  base  at  first  chosen  was 
property — usually  land.  Records  of  the  tax  systems  of 
ancient  Greece  and  Rome  have  been  preserved  with  suffi- 
cient accuracy  to  indicate  the  early  use  of  land  taxes  in 
these  countries.  With  the  development  of  other  forms  of 
property  attempts  were  made  to  extend  the  tax  systems 
to  include  them  as  a  part  of  the  base,  so  that  in  reality  a 
general  property  tax  was  established.  There  is  no  indi- 
cation, however,  that  much  was  attempted  in  the  way  of 
assessing  intangible  forms  of  wealth  when  they  began  to 
accumulate. 

The  history  of  tax  development  has  been  much  the 
same,  through  the  early  stages,  at  least,  in  most  new 
countries.  Practically  all  the  early  English  taxes  were 
forms  of  land  taxes.  Gradually  other  forms  of  wealth 
were  added,  until  a  general  property  tax  was  the  result. 
An  interesting  feature  to  develop  very  early  in  the  English 
system  was  the  use  of  the  annual  return  from  the  land  as 
the  base  of  the  tax,  rather  than  the  actual  value  of  the  land. 

1  In  this  and  the  following  chapters  which  treat  different  kinds  of  taxes, 
no  attempt  will  be  made,  except  occasionally,  for  illustrative  purposes,  to 
go  into  the  specific  problems  of  individual  states.  Those  who  want  to 
investigate  these  details  should  consult  such  sources  as  the  reports  of  the 
State  Tax  Commissions  and  the  Proceedings  of  the  National  Tax  Asso- 
ciation. 


PROPERTY  TAXES  231 

In  France,  Germany,  and  Italy,  the  sequence  of  events 
in  tax  development  followed  those  in  England.  Land  was 
the  first  source  drawn  upon,  to  which  was  gradually  added 
the  other  forms  of  wealth,  until  the  general  property  tax 
was  in  vogue.  Subsequent  history  shows,  however,  that 
as  more  and  more  intangible  wealth  accumulated  in  the 
various  countries,  and  as  the  failure  in  making  fair  and 
equal  assessment  became  apparent,  such  vigorous  opposi- 
tion developed  that  the  result  has  been  the  practical 
abandonment  of  the  general  property  tax. 

Early  American  Taxes. — In  the  American  Colonies  the 
use  of  a  tax  on  property  came  very  early.  Funds  became 
necessary,  and  the  officials  knew  of  no  better  source  than 
the  existing  evidences  of  wealth.  In  the  colony  of  New 
York,  for  example,  as  early  as  1654  Peter  Stuyvesant  suc- 
ceeded, as  previously  noted,  in  having  an  "  honest  and 
fair  tax"  placed  upon  "land,  houses  or  lots,  and  milch 
cows  or  draft  oxen."  Soon  after  this,  under  the  English 
rule,  the  principle  of  assessing  every  person  in  proportion 
to  his  aggregate  property  became  the  fundamental  rule. 
The  principle  of  property  assessment  continued  to  be  the 
center  around  which  all  future  revenue  measures  were 
formulated. 

In  some  of  the  Colonies  the  development  of  the  general 
property  tax  was  gradual.  Specific  classes  of  property 
were  designated  as  the  basis  for  assessment,  and  frequently 
the  value  of  the  property  was  regulated  by  law.  Land, 
horses,  cattle,  and  other  forms  of  property  were  classified 
into  different  grades.  Gradually,  as  the  pressure  for  in- 
creased revenue  became  felt,  the  category  of  taxable  ob- 
jects was  extended,  until  it  included  all  forms  of  property. 
In  some  of  the  Colonies  also  levies  were  placed  upon  cer- 
tain classes  of  business  and  professions. 

The  necessity  of  holding  land  before  being  admitted  to 
the  full  rights  of  citizenship,  as  well  as  the  provision  in  the 
Federal  Constitution  which  forbids  the  levy  of  export 
and  import  duties  by  the  several  states,  helped  to  tighten 


232  OUTLINES  OF  PUBLIC  FINANCE 

the  grip  on  property  as  the  chief  source  of  revenue.  This 
situation  has  continued  throughout  the  development  of 
revenue  systems  in  the  various  states;  consequently,  as 
new  forms  of  wealth  appeared,  it  became  inevitable  that 
an  attempt  be  made  to  assess  this  wealth  by  an  extension 
of  the  general  property  tax.  Although  some  of  the  states 
have  recently  made  efforts  to  place  less  reliance  on  its  use, 
the  general  property  tax  still  holds  the  place  of  primary 
importance  in  the  revenue  systems  of  most  states  and 
localities. 

127.  Democratic  Ideals  Have  Influenced  the  Tax  Sys- 
tem.— It  is  difficult  to  describe  the  minutia  of  the  workings 
of  the  general  property  tax  by  the  use  of  broad  generaliza- 
tions. Each  of  the  forty-eight  states  is  governed  by  an 
individual  constitution,  and  different  ideas  prevail  among 
the  older  and  newer  sections  of  the  country  as  to  the 
nature  and  functions  of  government.  One  need  not  be 
surprised,  then,  to  find  wide  variations  in  the  application 
of  revenue  systems  the  fundamentals  of  which  are  the 
same.  Perhaps  the  most  easily  traced  are  those  which 
arise  because  the  conceptions  as  to  the  functions  of  gov- 
ernment are  not  uniform. 

The  most  purely  democratic  form  of  government  on  the 
Continent  was  developed  in  the  New  England  colonies, 
and  this  spirit  of  democracy  still  permeates  the  New  Eng- 
land states,  and  those  which  have  been  modeled  after 
them.  The  machinery  and  working  of  the  general  property 
tax  in  this  district  corresponds  to  what  one  might  expect 
under  such  circumstances.  The  important  governmental 
unit  is  small,  usually  designated  as  the  town  or  township, 
and  varies  in  size  from  a  small  city  ward  in  some  of  the 
Eastern  states  to  the  regulation  township  in  some  of  the 
states  farther  west.  The  burden  placed  upon  each  asses- 
sor is  so  small  that  his  duties  can  generally  be  performed 
in  a  few  days,  and  do  not  materially  interfere  with  his 
ordinary  business.  He  is  elected  by  his  associates,  usually 
for  one  or  two  years,  and  would  naturally  be  expected  to 


PROPERTY  TAXES  233 

have  some  knowledge  of  the  property  which  it  becomes 
his  duty  to  assess. 

There  is  a  wide  variation  in  the  amount  of  centralized 
control  which  is  exercised  over  the  fiscal  machinery  in 
the  region  where  this  type  prevails.  It  may  be  said  to 
exist  in  some  degree  in  the  territory  north  and  east  of  the 
Ohio  and  Mississippi  rivers.  It  would  naturally  be  ex- 
pected that  this  centralized  control  would  be  less  in  those 
districts  where  the  ideals  of  democracy  were  most  firmly 
fixed.  In  the  old  New  England  states,  therefore,  there  is 
comparatively  little  supervision  from  any  central  authori- 
ties. Rhode  Island  furnishes  the  most  extreme  example  of 
absence  of  centralization,  although  the  same  situation  pre- 
vails to  a  less  extent  in  other  states. 

In  Rhode  Island  the  county  does  not  exist  in  the  sense 
that  it  is  found  in  other  states.  The  state  provides  for 
the  tax  by  general  statute,  determines  the  amount  of  the 
state  levy,  and  leaves  the  administrative  details  entirely 
to  local  authorities.  The  necessary  number  of  assessors  is 
elected  at  the  regular  town  meeting,  and  these  assessors 
have  broad  and  practically  final  powers  in  the  assessment 
of  property.  In  some  states  these  ideals  of  local  autonomy 
have  been  less  fixed,  and  the  amounts  collected  for  the 
counties  and  states  have  assumed  a  large  proportion  of 
the  entire  tax.  Under  these  conditions  there  has  been  a 
gradual  development  of  central  supervision.  County  and 
state  equalization  boards  have  been  instituted;  super- 
vision is  exercised  over  local  assessors  by  county  and  state 
officers,  and  meetings  of  local  assessors  are  frequently 
held  that  they  may  be  instructed  in  more  just  and  efficient 
methods  of  rendering  their  services. 

128.  The  Southern  and  Western  States  Present  Cen- 
tralized Tax  Systems. — Less  importance  is  attached  to 
the  duties  of  local  officials  in  the  parts  of  the  country  that 
failed  to  develop  strong  local  governments.  The  planta- 
tion type  of  development  in  the  South  did  not  encourage 
local  assemblies  for  the  purpose  of  determining  fiscal, 


234  OUTLINES  OF  PUBLIC  FINANCE 

political,  and  economic  policies.  The  important  adminis- 
trative governmental  unit  in  the  South,  consequently,  is 
the  county,  and  because  of  the  size  of  the  unit  the  tax 
system  is  necessarily  more  centralized  than  that  described 
above. 

The  property  in  the  county  is  usually  assessed  by  one 
or  more  assessors  under  the  direction  of  the  county  court. 
Obviously  the  assessors  can  know  little  concerning  either 
the  persons  or  property  to  be  assessed.  Much  more  re- 
liance must  be  placed  upon  the  declaration  of  the  tax- 
payer, and  less  upon  the  personal  judgment  of  the  assessor 
than  in  the  Northern  states.  Systems  to  prevent  evasion 
have  been  introduced,  and  penalties  have  been  prescribed 
against  violators  of  the  tax  laws.  Property  frequently 
escapes  the  assessors,  and  it  becomes  necessary  to  sup- 
plement their  efforts  by  those  of  other  officials. 

In  the  Western  states  the  plan  of  centralization  is  car- 
ried to  greater  lengths.  The  county  is  not  an  automaton, 
but  an  administrative  unit  which  acts  under  the  direction 
of  the  state.  Methods,  rates,  and  the  different  adminis- 
trative features  are  usually  formulated  by  state  officials, 
while  state  equalization  boards  are  maintained  to  equalize 
the  assessments  among  the  counties.  The  extent  and 
effectiveness  of  central  control  have  become  an  important 
factor  in  the  success  of  property  tax  administration. 

129.  Some  Features  of  the  Early  Property  Tax  Do  Not 
Now  Exist. — In  the  course  of  its  development  many 
changes  have  occurred  in  the  nature  of  the  general  prop- 
erty tax.  At  its  inception  it  was  distinctly  a  personal  tax 
levied  to  secure  revenue  for  local  purposes.  In  the  modern 
use  of  the  tax  the  property  itself,  rather  than  the  owner, 
is  the  fundamental  basis  of  the  assessment.  The  practice 
of  requiring  personal  declarations  continues  to  be  followed 
in  a  number  of  localities,  but  where  these  cannot  be 
secured  an  assessment  is  made  against  the  property.  This 
method  of  procedure  illustrates  the  importance  which  is 
attached  to  the  property  aspect.  Assessors  are  usually 


PROPERTY  TAXES  235 

instructed  to  assess  all  the  property  in  their  district, 
whether  ownership  be  located  there  or  not.  As  the  func- 
tions of  government  grew  the  services  rendered  by  the 
locality  were  supplemented  by  those  of  the  state  and 
county,  and  need  for  a  larger  revenue  appeared  in  these 
larger  political  units.  The  most  feasible  process  to  follow 
to  supply  the  necessary  funds,  it  seemed,  was  to  use  the 
machinery  already  in  existence,  and  to  add  a  state  and 
county  tax  rate  to  the  one  for  local  purposes. 

Classification  of  Property. — The  classification  of  property 
has  come  with  the  development  of  the  property  tax.  The 
attempt  has  been  made  to  designate  two  general  classes — 
real  property  and  personal  property,  with  the  further 
division  of  personal  property  into  tangible  and  intangible 
property.  In  general,  real  property  refers  to  land  and  that 
which  is  attached  to  it,  while  personal  property  designates 
movables,  or  those  objects  which  are  more  closely  related 
to  personal  use  than  they  are  to  land. 

Property  does  not  fall  naturally  into  the  above  classes, 
and  the  inconsistencies  and  difficulties  which  are  encoun- 
tered in  the  various  states  in  the  attempts  at  classification 
but  illustrate  the  arbitrariness  of  such  a  division.  A  tree 
in  the  forest,  for  example,  is  real  estate,  but  as  soon  as  it  is 
felled  it  becomes  personal  property;  gravel  in  the  creek 
bed  is  real  estate,  but  as  soon  as  it  is  thrown  out  on  the 
bank  it  becomes  personal  property. 

One  may  find  court  decisions  which  have  classified 
property  in  a  purely  arbitrary  manner.  Many  legisla- 
tures also  make  arbitrary  classifications  for  administra- 
tive purposes.  The  state  of  New  York,  for  example, 
classes  the  special  franchise  value  of  public  utilities  as 
real  estate.  It  is  impossible,  then,  to  generalize  as  to  what 
property  belongs  in  each  division,  but  one  must  rely  upon 
the  more  or  less  arbitrary  decisions  of  legislatures  and 
courts,  the  lack  of  uniformity  of  which,  in  the  different 
states,  is  striking. 

Property  and  Ability,— Changes  in  economic  institu- 


236  OUTLINES  OF  PUBLIC  FINANCE 

tions  have  resulted  in  the  situation  that  the  possession  of 
property  no  longer  represents  ability  to  meet  tax  burdens. 
In  a  purely  agricultural  community,  in  its  primitive  stage 
of  development,  property  was  an  approximate  test  of 
ability,  for  here  each  individual  was  concerned  with  real- 
izing a  return  from  his  land,  and  the  amount  of  land  was 
a  measure  of  opportunity  and  ability.  As  industries  and 
trades  developed,  however,  livelihoods  came  from  other 
sources  than  the  ownership  of  property.  Some  ability  to 
bear  tax  burdens  must  be  recognized  in  the  receipt  of  a 
salary  or  wage,  even  though  there  be  no  possession  of 
property. 

The  forms  of  property  have  also  differentiated  with 
economic  development,  so  that  all  property  does  not  have 
the  same  ability  to  bear  burdens.  The  real  criterion  of 
taxpaying  ability  is  the  productiveness  of  the  property. 
In  the  case  of  two  factories  or  farms,  each  of  the  same 
value,  one  may  enjoy  a  profitable  year  and  the  other  meet 
with  reverses;  the  one  be  able  to  bear  tax  burdens  and  the 
other  not.  In  our  modern  economic  organization  prop- 
erty represents  ability  to  meet  burdens  only  as  it  is  a 
productive  entity. 

130.  Marked  Variations  Occur  in  the  Assessment  of 
Real  Property. — The  instructions  which  most  assessors  re- 
ceive require  that  real  estate  be  assessed  at  a  fair  cash 
value — that  is,  what  it  would  bring  at  sale  with  a  willing 
purchaser  and  willing  seller.  That  some  method  of  uni- 
form assessment  should  be  used  becomes  apparent  when 
consideration  is  given  to  the  fact  that  the  state  and 
county  taxes  on  property  are  apportioned  among  the 
various  districts  on  the  basis  of  the  assessed  valuation. 

Results  of  Apportionment. — The  total  amount  to  be  ob- 
tained by  the  state  is  determined  and  then  apportioned  to 
the  local  tax  district ;  a  district  which  had  an  assessed  val- 
uation of  say  $100,000  would  be  asked  to  contribute 
twice  as  much  toward  the  state  fund  as  one  where  the 
valuation  was  $50,000.  Counties  frequently  apportion 


PROPERTY  TAXES  237 

their  demands  among  the  townships  or  tax  districts  in 
the  same  way,  so  that  the  total  rate  is  a  composite  sum 
of  the  state  rate,  plus  the  county  rate,  and  in  addition  the 
rate  representing  the  needs  of  the  local  district  itself.  In 
order,  then,  that  the  tax  burden  of  the  state  and  county 
be  equally  distributed,  it  is  necessary  that  some  uniform 
system  of  valuation  be  used.  Whether  it  be  full  valua- 
tion or  a  partial  valuation  would  make  little  difference  as 
long  as  the  same  basis  was  used  in  all  the  districts. 

It  is  a  matter  of  common  knowledge  that  anything  but 
uniformity  exists  in  making  assessments.  Lands  of  prac- 
tically the  same  nature  in  adjoining  townships  and  coun- 
ties have  been  assessed  at  figures  in  which  there  is  a  wide 
variation,  while  a  comparison  of  the  assessment  figures  of 
a  whole  state  frequently  shows  startling  results.  In  some 
states  the  assessed  value  has  ranged  all  the  way  from  20 
to  100  per  cent  of  the  actual  value.  In  adjoining  counties 
the  assessment  of  railroad  property  has  varied  more  than 
$20,000  per  mile. 

Such  discrepancies  in  assessment  must  mean  an  in- 
equality in  the  tax  burden  levied  by  the  state  and  county. 
If  the  same  basis  of  assessment  were  followed  within  a 
district,  and  none  of  the  taxes  collected  went  out  of  the 
district,  it  would  make  no  difference  in  the  burden  whether 
the  property  were  assessed  at  100  per  cent  or  20  per  cent 
of  actual  value.  Suppose  two  farms  in  this  district,  one 
worth  $100,000,  the  other  worth  $50,000,  and  that  the 
assessment  has  been  at  full  value.  The  officials  of  the 
district  decide  that  it  is  necessary  to  assess  $1,500  against 
this  property.  This  will  mean  a  ten  mill  tax  (tax  rates 
are  expressed  as  the  number  of  mills  taken  from  each  dol- 
lar valuation),  and  the  burden  upon  the  farms  will  be 
$1,000  and  $500,  respectively.  Let  us  suppose,  however, 
that  the  property  had  been  assessed  at  50  per  cent  of  the 
actual  value,  or  $50,000  and  $25,000.  The  basis  upon 
which  taxes  are  to  be  levied  is  thereby  reduced,  and  to  get 
the  required  revenue  the  rate  must  be  raised.  To  secure 


238  OUTLINES  OF  PUBLIC  FINANCE 

the  $1,500  the  officials  must  levy  a  twenty  mill  tax,  which 
imposes  exactly  the  same  burden  as  in  the  previous  assess- 
ment at  full  value. 

Suppose,  now,  that  under  certain  property  valuations, 
the  state  levies  a  five  mill  tax,  the  county  a  ten  mill  tax, 
and  each  local  district  a  five  mill  tax.  The  actual  prop- 
erty values  in  the  districts,  let  us  assume,  are  practically 
equal,  but  the  assessor  in  one  district  values  it  at  100  per 
cent;  in  another  at  50  per  cent,  and  in  still  another  at 
20  per  cent.  The  inequality  which  arises  from  collecting 
a  twenty  mill  tax,  the  total  of  the  three  rates,  at  once 
becomes  apparent.  The  property  assessed  at  full  value 
is  paying  twice  as  much  to  the  state  and  county  as  that 
assessed  at  50  per  cent  and  five  times  as  much  as  that 
assessed  at  20  per  cent. 

The  Local  Assessor. — It  is  too  much  to  expect  that 
assessors  for  a  whole  state,  or  even  for  a  county,  will  have 
the  same  ability  in  appraising  property,  or  would  use  the 
same  basis  of  calculating  values,  even  though  their  abili- 
ties were  approximately  equal.  The  qualifications  of  as- 
sessors, moreover,  frequently  leave  much  to  be  desired. 
The  remuneration  is  so  small  that  men  of  ability  do  not 
care  for  the  task,  and  it  is  left  to  be  performed  by  men  of 
little  ambition  and  second-rate  qualifications. 

The  fact  that  a  goodly  portion  of  the  revenue  collected 
in  most  districts  is  turned  over  to  the  state  and  county, 
makes  it  desirous  to  the  property  owners  that  their  as- 
sessments be  kept  low.  It  is  one  of  the  expectations  of  a 
satisfactory  assessor  that  he  keep  values  down.  In  order 
to  receive  the  votes  of  his  constituency  for  a  continuance 
in  office,  therefore,  he  too  frequently,  from  the  standpoint 
of  justice,  attempts  to  do  what  is  expected  of  him. 

The  assessor  must  frequently  make  returns  under  oath 
that  he  has  made  the  valuation  to  the  best  of  his  ability. 
In  one  of  the  states  where  the  discrepancy  between  the 
actual  value  and  the  assessed  value  is  most  flagrant,  the 
assessors  subscribe  to  an  oath  in  which  they  declare  that 


PROPERTY  TAXES  239 

the  assessment  has  been  made  at  the  full  value  of  the 
property.  In  the  same  state  a  statute  provides  that  an 
assessor  who  falsely  subscribes  to  an  oath  shall  be  liable 
to  the  penalties  of  perjury,  which  are  both  fine  and  im- 
prisonment. As  yet  it  seems  they  are  still  liable  for  the 
punishment,  but  have  not  received  it. 

131.  Much  Personal  Property  Is  Not  Assessed. — The  in- 
equalities in  real  estate  assessments  fade  into  insignificance 
when  the  results  of  the  attempts  to  reach  personal  prop- 
erty values  are  brought  in  review.  If  assessors  have  been 
unable  to  give  a  semblance  of  equality  in  the  assessment 
of  real  estate,  how  much  less  could  satisfactory  assess- 
ments of  the  multitudinous  forms  of  personal  property  be 
expected.  When  one  considers  the  task  which  devolves 
upon  the  assessor  when  he  is  instructed  to  get  the  value 
of  all  property,  there  is  little  wonder  that  results  are  so 
uncomplimentary. 

The  early  assessor,  in  valuing  personal  property,  had 
but  to  consider  live  stock,  agricultural  implements,  and 
other  objects  which  were  easily  discernible,  and  the  value 
of  which  was  well  known.  To  the  modern  assessor,  how- 
ever, the  assessment  of  tangible  objects  of  personalty 
presents  a  problem  which  is  more  complex.  Public  utili- 
ties, factories,  wholesale  establishments,  retail  stores  of 
various  kinds,  and  the  many  other  institutions  whose 
business  is  of  a  complex  nature,  may  be  in  his  district.  In 
a  number  of  states  the  assessor  is  required  to  secure  the 
full  and  true  value  of  all  the  property  as  it  is  on  the  first 
day  of  April,  or  " assessment  day,"  as  it  is  sometimes 
called.  Consider  the  magnitude  and  impossibility  of  the 
task.  He  must  locate  and  appraise  the  value  of  the  rolling 
stock  and  equipment  of  the  public  utilities;  he  must 
evaluate  the  machinery  in  the  factory,  the  raw  materials 
and  finished  products  on  hand;  he  must  assess  the  stock 
of  goods  contained  in  the  wholesale  establishments,  as 
well  as  those  in  department  and  simple  retail  stores.  To 
concede  even  the  possibility  of  anything  like  satisfactory 


340  OUTLINES  OF  PUBLIC  FINANCE 

results  presupposes  a  degree  of  intelligence  and  ability 
not  likely  to  be  found  in  the  ordinary  assessor.  Indeed, 
few  would  claim  to  possess  sufficient  qualifications  to  fit 
them  for  such  a  task. 

Intangible  Property. — To  the  burden  of  assessing  the 
various  forms  of  tangible  property  is  added  the  task  of 
securing  the  value  of  intangibles,  and  here  the  property 
tax  system  becomes  confusion  worse  confounded.  A  re- 
flection on  the  nature  of  much  of  the  intangible  property 
immediately  leads  one  to  sense  the  difficulty.  One  writer 
partially  describes  it  as  follows: 

Thus  a  large  part — in  fact,  the  larger  part — of  what  is  to-day  termed 
personal  property,  in  every  civilized  state,  is  of  the  most  intangible 
character,  and  in  a  great  part  invisible  and  incorporeal;  such,  for  ex- 
ample, as  negotiable  instruments  in  the  form  of  bills  of  exchange, 
state,  municipal,  and  corporate  bonds,  and  the  multiplied  forms  of 
evidence  of  indebtedness,  certificates  of  stocks,  copyrights,  patents, 
legal-tender  notes,  etc.,  all  of  which,  if  entitled  to  the  name  of  property, 
is,  through  a  great  variety  of  circumstances,  constantly  exposed  to  fluc- 
tuations in  value,  frightful  in  amount,  and  incalculable  in  their  sudden- 
ness, and  under  the  influence  of  which  wealth  vanishes  as  if  by  the  wave 
of  a  magician's  wand.  It  is  offset  or  measured  by  indebtedness  which 
may  never  be  the  same  one  hour  with  another,  is  easy  to  transfer,  and  as 
essential  to  using,  is,  in  fact,  continually  transferred  from  one  locality 
to  another,  and  from  the  jurisdiction  of  one  state  to  the  jurisdiction 
and  laws  of  another  and  different  state;  is  here  to-day,  gone  to-mor- 
row; is  burned,  sunk  at  sea,  lost  in  mines,  patents,  railways,  factories, 
trading  associations,  and  in  a  thousand  other  different  ways.  It  has 
been  recently  said  that  five  men  who  do  business  in  Boston  can  to- 
gether control  or  dispose  of  an  amount  of  property  which  equals  one- 
fifteenth  of  the  entire  assessed  valuation  of  that  city;  and  that  they 
could,  if  they  pleased,  carry  round  the  evidence  of  the  existence  of  that 
property  in  their  coat  pockets,  or,  according  to  popular  theory,  the 
property  itself.1 

This  description  vividly  portrays  the  nature  of  what  the 
assessor  is  expected  to  value,  and  it  is  little  wonder  that 
he  takes  the  path  of  least  resistance,  places  on  the  assess- 
ment roll  the  property  which  is  easily  found,  and  allows 

1  D.  A.  Wells,  The  Theory  and  Practice  of  Taxation,  p.  401. 


PROPERTY  TAXES 


241 


the  rest  to  escape.  When  we  consider,  moreover,  that  the 
laws  designate  all  such  evidences  of  wealth  as  stocks  and 
bonds  to  be  assessable  property,  it  becomes  evident  that, 
in  most  districts,  the  assessed  value  of  personalty  should 
far  exceed  that  of  real  estate.  Yet  it  is  a  notorious  fact 
that  nowhere  does  the  value  placed  upon  personal  property 
even  approximate  that  placed  upon  real  estate.  In  some 
states  where  there  has  been  a  large  increase  in  the  real 
estate  valuations,  the  assessed  valuation  of  personal  prop- 
erty has  actually  decreased.  It  is  a  very  common  situa- 
tion for  personal  property  to  bear  less  than  20  per  cent 
of  the  tax  burden,  and  it  frequently  falls  as  low  as  3 
to  5  per  cent. 

Statistics  of  Valuation. — A  few  figures  from  the  census 
reports,  chosen  almost  at  random,  will  serve  to  visualize 
the  relative  positions  of  these  two  classes  of  property,  as 
far  as  the  assessors'  books  are  concerned.  The  following 
figures  show  the  assessed  value  of  real  estate  at  different 
times,  as  compared  with  the  total  assessment  of  property 
for  five  states  in  various  parts  of  the  Union.  The  first 
set  of  figures  represents  the  total  assessment,  while  those 
just  beneath  are  real  estate  values.  The  relation  between 
the  two  can  be  calculated  easily  from  this. 

ASSESSED  VALUATION  OF  ALL  PKOPERTY  COMPARED  WITH  THE  ASSESSED 
VALUATION  OF  REAL  ESTATE 

(000  omitted) 


I860 

1880 

1902 

1912 

1918 

Ohio  
New  York  .  . 
Kansas  
Texas  

$    957,807 
687,518 
1,390,465 
1,069,658 
22,518 
16,089 
267,792 

$1,534,361 
1,093,678 
2,651,940 
2,329,282 
160,892 
108,432 
320,365 

$1,990,885 
1,396,180 
5,969,913 
5,297,764 
363,163 
242,071 
1,017,572 

$6,481,059 
4,335,666 
11,131,779 
10,684,290 
2,746,900 
1,798,339 
2,532,710 

$8,542,734 
5,277,180 
12,091,438 
11,605,615 
3,075,275 
1,920,070 
2,888,365 

California.  .  . 

102,476 
139,655 
66,907 

205,509 

584,578 
466,274 

652,603 
1,290,239 
974,493 

1,650,198 
2,921,277 
2,163,020 

2,011,109 
Not 
given 

242 


OUTLINES  OF  PUBLIC  FINANCE 


A  glance  at  these  figures  will  reveal  the  large  proportion 
of  the  tax  burden  which  is  borne  by  real  estate.  It  becomes 
still  more  evident  when  figures  for  some  of  the  larger  cities 
are  compared.  Figures  are  shown  in  the  following  table 
for  four  cities  for  different  dates.  The  first  number  in  the 
column  shows  the  assessed  value  of  real  estate;  the  one 
just  beneath  it  that  of  personal  property. 

ASSESSED  VALUATION  OF  REAL  ESTATE  AND  PERSONAL  PROPERTY 
(000  omitted) 


Date 

New  York 

Chicago 

Washington 

San  Francisco 

1905. 

$5,221,584 

$295,514 

$239  461 

$398  983 

1907 

609,562 
6  240  480 

112,447 
346  844 

18,806 
255  325 

2,270 
349  511 

1912. 

554,861 
7,861,899 

131,078 
670,652 

22,403 
330,322 

105,196 

447  777 

1916  
1918.     .   . 

342,963 
8,108,761 
352,052 
8,254,549 

227,067 
749,887 
245,438 
753,322 

29,610 
394,209 
35,042 
410,173 

62,562 
476,825 
61,879 
482  618 

419,156 

263,402 

340,0671 

72,132 

1  The  explanation  of  this  remarkable  increase  in  the  assessment  of  personal  property 
given  by  the  Bureau  of  the  Census  is  as  follows: .  "Prior  to  1918  the  only  personal  property 
subject  to  taxation  in  the  District  of  Columbia  was  tangible  personal  property,  but  in  1918 
the  law  was  changed  requiring  that  intangible  personal  property  be  assessed  for  taxation." 
The  large  assessment  of  personal  property  for  1918  is  an  interesting  exception  to  the  general 
rule. 

No  comment  is  needed  to  show  that  a  wholesale  evasion 
of  personal  property  assessment  exists.  Figures  for  other 
cities  are  just  as  startling.  The  conclusions  follow  that 
personal  property  cannot  be  reached  by  the  assessors,  or 
at  least  is  not  reached,  and  that  this  class  of  property 
bears  tax  burdens  inversely  proportionate  to  the  amount. 

132.  Difficulties  Arise  in  Exempting  Property  from  Tax- 
ation.— The  caption,  "  general  property  tax,"  is  somewhat 
misleading,  for  specific  kinds  of  property  are  generally 
relieved  from  the  application  of  the  law.  In  some  of  the 
earlier  states  one  of  the  privileges  which  attended  citizen- 
ship was  the  freedom  from  paying  taxes.  Exemption 
from  taxes  to  some  extent  is  still  practiced  by  most  gov- 
ernments. Difficulty  in  administering  the  tax  laws  has 


PROPERTY  TAXES  243 

been  responsible  for  some  exemptions,  while  others  are 
granted  in  an  attempt  to  make  the  tax  system  more  just. 

Agitation  for  Exemption. — The  inability  to  administer 
the  tax  laws  in  a  satisfactory  manner  has  led  to  much 
agitation  for  the  extension  of  exemption  provisions.  Thus 
several  states,  because  mortgages  were  not  being  assessed, 
have  exempted  them  from  the  property  tax.  Many  au- 
thorities urge  the  exemption  of  all  intangible  personal 
property  from  taxation,  and  would  reach  the  ability  thus 
represented  in  other  ways.  Some,  who  feel  that  taxpayers 
should  know  the  burden  of  the  taxes  they  pay,  see  injus- 
tices in  indirect  tax  systems,  and  would  have  these  abol- 
ished. A  few  would  even  go  so  far  as  to  exempt  all  bases 
for  taxes  except  land  values.  The  question  of  exemption 
takes  on  a  somewhat  different  form,  according  to  the 
nature  and  advancement  of  a  country,  yet  it  forms  an 
important  feature  of  all  tax  systems. 

Kinds  of  Exemptions. — One  of  the  most  common  of  the 
exemptions  from  property  taxes  has  been  a  minimum 
amount  of  property.  This  has  been  for  two  reasons :  first, 
because  there  has  been  the  desire  to  recognize,  as  it  were, 
a  minimum  of  subsistence;  and  second,  the  administra- 
tive duties  in  finding  and  assessing  small  amounts  of 
property  proved  entirely  too  burdensome  for  the  returns 
in  revenue.  Consequently  a  few  hundred  dollars  are 
usually  exempt  from  taxes.  Frequently,  also,  particular 
classes  of  property,  such  as  mechanics'  tools,  are  placed 
in  the  exempt  class.  Exemptions  are  sometimes  granted 
to  industries  during  the  developmental  stage,  or  as  an 
incentive  to  get  them  to  locate  in  particular  localities. 
Much  variation,  however,  can  be  found  hi  the  practice 
of  the  various  political  units. 

Other  kinds  of  property  which  are  free  from  taxes  are 
imported  goods  in  the  original  package,  and  goods  in  the 
process  of  transportation.  Most  states  exempt  the  de- 
posits in  savings  banks.  Public  property  of  the  various 
political  units,  such  as  buildings  and  parks,  likewise  enjoys 


244  OUTLINES  OF  PUBLIC  FINANCE 

freedom  from  the  burden  of  taxes.  Public  welfare  insti- 
tutions receive  similar  treatment.  Under  these  come  such 
institutions  as  churches,  hospitals,  cemeteries,  horticul- 
tural societies,  and  the  various  charitable  institutions, 
such  as  county  farms,  almshouses,  and  homes  for  orphans 
and  the  aged.  Property  used  for  educational  and  develop- 
mental purposes  is  treated  in  like  fashion.  Not  only  does 
this  include  public  institutions,  but  it  generally  extends 
to  endowed  colleges,  libraries,  and  various  kinds  of  scien- 
tific and  literary  organizations. 

It  seems  no  more  than  just  to  make  the  burdens  upon 
public  uplift  institutions  as  light  as  possible.  In  many 
cases,  where  the  institutions  are  owned  by  the  state,  taxa- 
tion would  simply  mean  the  transferring  of  the  amount 
of  the  tax  from  one  pocket  to  the  other.  The  exemption 
of  such  property  when  owned  by  individuals  has  not 
always  been  accepted  in  good  faith,  but,  on  the  other 
hand,  has  frequently  been  abused.  Property  holdings  far 
in  excess  of  the  need  for  carrying  on  their  operations  have 
been  accumulated  by  some  of  these  institutions.  Tax 
exemption  has  been  claimed,  although  the  returns  from 
the  property  are  much  more  of  an  individual  than  public 
nature.  This  condition  has  led  to  considerable  agitation, 
in  some  localities,  for  the  removal  of  the  tax  exemption 
privilege  upon  this  class  of  property. 

Governmental  Activities. — A  common  source  of  tax  ex- 
emption is  found  in  the  securities  issued  by  different 
political  units — Federal,  state,  and  local.  It  has  been  the 
practice  of  the  Federal  government  to  exempt  its  securi- 
ties from  most  taxes,  and  it  has  been  held,  in  the  famous 
McCullough  vs.  Maryland  case,  that  the  states  cannot 
even  indirectly  tax  the  instruments  of  the  Federal  gov- 
ernment. It  has  also  been  the  common  practice  and 
belief  that  the  Federal  government  cannot  tax  the  instru- 
ments that  the  states  use  in  their  functions. 

These  two  views  create  a  large  class  of  tax  exemptions 
that  has  become  particularly  significant  since  the  intro- 


PROPERTY  TAXES  245 

duction  of  the  income  tax.  The  freedom  of  the  income  of 
Federal,  state,  and  municipal  bonds  from  the  income  tax, 
while  the  income  from  the  bonds  of  commercial  enterprises 
is  taxed,  sometimes  places  a  hardship  and  disadvantage 
upon  the  latter  class  of  securities.  Inequality  likewise  is 
placed  upon  different  classes  of  citizens.  There  is  little 
reason,  for  example,  why  a  salary  of  $5,000  received  by 
an  employee  of  a  corporation  should  be  taxed,  while  the 
$5,000  paid  to  an  employee  of  a  state  should  not  be  taxed. 

133.  Evils  of  Double  Taxation  Arise  with  the  Use  of 
Personal  Property  Taxes. — The  expression  "  double  taxa- 
tion "  appears  almost  self-explanatory,  yet  it  may  have 
a  number  of  applications.  In  general,  it  refers  to  the  levy 
and  collection  of  two  taxes,  the  burden  of  which  falls  upon  / 
the  same  base.  Such  an  occurrence  immediately  appears 
to  be  unjust.  This,  however,  is  not  necessarily  true.  If 
a  tax  were  levied  upon  all  property,  for  example,  and  then 
a  tax  were  levied  upon  the  income  from  this  property,  it 
might  be  called  a  case  of  double  taxation.  It  would  be 
unjust,  however,  only  if  some  classes  of  the  property 
owners  were  subject  to  the  income  tax  while  others  were 
not.  Under  such  conditions  the  income  tax  would  be  a 
discriminating  tax.  When  two  taxes  are  levied  alike  upon 
all  classes,  the  result  is  the  same  as  if  a  higher  property  or 
a  higher  income  tax  had  been  used.  The  use  of  the  ex- 
pression "  double  taxation,"  however,  usually  implies  an 
injustice,  so  that  it  might  be  well  to  use  another  ex- 
pression, say  "dual  taxation,"  to  apply  to  the  levy  of 
two  taxes  upon  the  same  base  when  no  injustice  is 
perpetrated. 

Many  cases  of  double  taxation  and  even  multiple  taxa- 
tion arise,  however,  which  are  clearly  unjust  because  of 
the  unequal  burden  which  they  impose  upon  different 
classes  of  property.  Cases  of  this  nature  arise  within  a 
particular  taxing  jurisdiction,  and  to  a  magnified  degree 
where  competing  jurisdictions  are  concerned.  Double 
taxation  arises  in  the  first  case  from  the  attempt  to  tax 


246  OUTLINES  OF  PUBLIC  FINANCE 

land  and  factories  and  from  the  attempt  at  the  same  time 
to  tax  evidences  of  claims  upon  this  property.  The  same 
situation  arises  between  competing  jurisdictions  because 
of  the  individual  code  of  tax  laws  which  each  jurisdic- 
tion has  adopted,  with  little  regard  for  inter  jurisdiction 
comity.^  The  states,  in  particular,  have  been  anxious  to 
extend  their  jurisdiction  over  as  much  taxable  property 
as  possible.  This  ambition  has  often  been  so  keen  that 
the  legislatures,  and  even  the  courts,  have  frequently  lost 
sight  of  what  would  ordinarily  be  called  fair  play.  The 
result  is  that  tax  systems  exist  that  will  not  stand  the 
requirements  of  justice  under  the  present  industrial 
organization. 

•  Place  of  Levy. — Much  litigation  has  arisen  over  the 
proper  situs  or  location  of  property  for  purposes  of  assess- 
ment, and  many  unsatisfactory  decisions  have  been  ren- 
dered. When  securities  are  assessed  by  the  officials  of  one 
jurisdiction,  and  the  property  in  which  these  securities 
represent  but  an  interest  is  assessed  in  another  jurisdic- 
tion, a  part  of  the  tax  is  clearly  an  unjust  burden.  A 
share  of  stock  of  a  corporation  chartered  in  New  Jersey, 
and  owned  by  a  citizen  of  Pennsylvania,  who  is  tempo- 
rarily living  in  Maryland,  should  obviously  not  be  taxed 
in  the  three  different  states;  yet  such  attempts  have  been 
made,  and  marked  injustice  often  arises.  Modern  indus- 
try is  so  expansive  that  a  single  business  unit  may  be 
represented  in  a  number  of  tax  districts,  which  creates  the 
possibility  of  a  multiplication  of  taxes. 

Many  factors  have  been  used  by  the  different  states  in 
determining  the  proper  principle  upon  which  to  make  the 
tax  levy.  Some  use  citizenship  as  the  proper  criterion 
upon  which  to  make  the  levy,  while  others  use  domicile, 
situs  of  property,  situs  of  securities,  or  other  factors,  until 
it  is  possible  to  have  taxes  levied  by  as  many  as  a  half 
dozen  states  upon  the  same  taxable  base.  ^  If  every  juris- 
diction should  decide  upon  the  same  principle,  then  there 
woul4  be  little  need  to  raise  the  question  of  double  taxa,- 


PROPERTY  TAXES  247 

tion.    The  disinclination  to  do  this,  however,  makes  the 
problem  a  serious  one. 

The  principle  of  citizenship  is  one  that  is  frequently  fol- 
lowed in  determining  where  taxes  should  be  paid.  The 
United  States,  for  example,  levies  an  income  tax  upon  its 
citizens  no  matter  where  they  are  located.  Citizenship, 
no  doubt,  was  at  one  time  the  important  consideration, 
and  still  has  some  claim  in  a  state's  right  to  levy  taxes. 
Under  the  organization  of  industry  as  it  is  at  present, 
however,  other  factors  must  be  given  consideration.  A 
man,  for  example,  may  be  a  citizen  of  one  taxing  district, 
may  be  a  permanent  resident  of  another,  may  for  the 
time  being  be  living  in  still  another,  and  have  all  his 
property  in  the  form  of  a  corporate  business  located  in  a 
fourth  district,  the  charter  of  which  was  taken  out  in  still 
another  district.  Each  of  the  districts  has  some  claim  to 
tax  the  individual,  while  evidently  there  is  but  one  prop- 
erty upon  which  the  burden  of  the  tax  can  fall. 

It  may  be  true  that  taxes  should  be  paid  in  more  than 
one  district — in  fact,  it  seems  reasonable  that  an  individ- 
ual should  pay  taxes  at  least  in  the  district  where  his  , 
property  is  located  and  where  he  has  his  permanent  resi- 
dence. Yet  it  does  not  follow  that  each  of  these  districts  ' 
should  levy  the  tax  as  if  its  tax  were  the  only  one  to  be 
levied.  It  has  been  suggested  that  the  owner  of  property 
should  be  taxed  where  his  real  economic  interest  is  found. 
The  suggestion  is  good,  but  to  carry  it  out  it  would  be 
necessary  to  secure  the  proper  apportionment  of  the  tax 
burden  among  the  districts  where  the  interests  of  the 
indvidual  lie,  and  to  get  each  district  to  respect  the  rights 
of  the  other  taxing  units.  Until  this  is  accomplished  a 
large  amount  of  injustice  may  be  expected  in  the  taxes 
levied  by  competing  jurisdictions. 

Bases  for  tax  levies  are  sometimes  arbitrarily  made.  A 
good  example  of  this  situation  is  the  taxation  of  the  shares 
of  stock  of  national  banks.  These  shares  must  be  assessed 
to  the  owner  at  his  place  of  residence,  but  for  purposes  of 


248  OUTLINES  OF  PUBLIC  FINANCE 

taxation  his  residence  shall  be  considered  in  the  district 
where  the  bank  is  located.  A  man  living  in  California, 
who  owns  shares  of  stock  in  a  national  bank  in  New  York, 
would  be  assessed  and  taxed  on  the  shares  as  if  he  lived  in 
New  York. 

134.  The  Proper  Handling  of  Indebtedness  Is  Difficult. 
—Much  difficulty  has  arisen  in  handling  indebtedness. 
Where  indebtedness  exists  it  is  obviously  unjust  to  tax 
both  the  debtor  on  his  indebtedness  and  the  creditor  on 
the  evidence  of  this  indebtedness.  On  the  face  of  the 
proposition  it  is  what  an  individual  has,  and  not  what  he 
owes,  that  gives  ability  to  meet  tax  burdens.  When  evi- 
dences of  indebtedness  are  taxed  the  same  property  may 
be  made  the  basis  of  many  taxes.  Suppose,  for  example, 
a  man  buys  a  house  and  gives  a  five-year  promissory  note 
in  payment;  in  a  few  days  he  sells  the  house  and  likewise 
accepts  a  note;  this  purchaser  in  turn  sells  and  accepts  a 
note.  There  now  exist  three  notes  and  a  house  which 
the  assessor  is  expected  to  assess  separately  to  four  dif- 
ferent individuals.  It  is  the  general  consensus  of  opinion 
that  indebtedness  does  not  create  ability  to  bear  tax 
burdens,  but  in  fact  lessens  such  ability.  Many  authori- 
ties, consequently,  have  declared  themselves  in  favor  of 
allowing  the  deduction  of  debts  from  property  assessments. 

When  debt  deduction  is  permitted,  however,  the  way 
is  at  once  open  to  so  much  fraud  and  deception  as  practi- 
cally to  defeat  the  tax.  Fictitious  debts  are  frequently 
created  to  such  an  extent  that,  when  offset  against  the 
property,  there  is  nothing  left  to  tax.  It  is  comparatively 
easy  for  two  neighbors,  just  before  assessment  day,  to 
lend  to  each  other,  without  giving  notes,  a  sum  sufficient 
to  offset  any  property  valuations  which  might  exist.  It 
opens  a  particularly  easy  way  for  corporations  to  escape 
assessment  on  capital  stock.  Bonds,  of  course,  are  items 
of  indebtedness,  and  under  the  plan  of  debt  deduction 
should  be  subtracted  from  the  value  of  the  capital  stock. 
Corporations,  therefore,  simply  need  to  issue  bonds  to 


PROPERTY  TAXES  249 

the  amount  of  the  capital  stock,  and  when  indebtedness 
is  deducted  there  is  nothing  left  to  tax.  Evils  of  compara- 
tive magnitude  exist,  therefore,  whether  or  not  debt  ex- 
emption is  permitted,  and  there  seems  to  be  no  way  to 
escape  the  difficulties.  Some  states  have  attempted  to 
solve  the  problem  by  allowing  debt  deductions  from  per- 
sonal property,  but  not  from  real  estate,  with  results  that 
have  been  entirely  unsatisfactory.  Such  a  practice  fre- 
quently causes  a  very  arbitrary  classification  of  property. 
In  the  state  of  New  York,  for  example,  where  debt  deduc- 
tions are  permitted  from  personal  property  but  not  from 
real  estate,  special  franchise  values  are  classed  as  real 
estate  to  prevent  the  deduction  of  indebtedness  which 
might  exist. 

Taxation  of  Mortgages. — Mortgages  on  real  estate  form 
one  class  of  indebtedness  that  has  caused  much  concern 
to  fiscal  officials  and  authorities.  Obviously,  to  assess  a 
piece  of  land  at  full  value,  and  then  assess  the  mortgage 
that  is  against  it,  is  a  case  of  unwarranted  double  taxation. 
If  every  piece  of  property  were  mortgaged  in  the  same 
proportion,  and  all  property  and  all  mortgages  taxed, 
then  no  injustice  would  be  perpetrated  because  the  same 
burden  would  be  placed  upon  all  property.  Where  only 
a  part  of  the  property  is  mortgaged,  however,  and  both 
the  mortgage  and  the  property  are  taxed,  it  is  an  unjust 
burden  upon  the  mortgaged  property.  The  mere  issue  of  a 
claim  to  one  half  the  value  of  a  $50,000  farm  does  not 
increase  the  taxpaying  ability  of  the  farm.  If  the  farm  is 
taxed  to  its  full  value,  and  in  addition  the  mortgage  is 
taxed,  it  means  that  the  tax  burden  is  50  per  cent  greater 
than  that  upon  unencumbered  land.  It  is  generally  be- 
lieved, moreover,  that  a  tax  on  mortgages  is  shifted  to  the 
borrower  through  an  increase  in  the  interest  rate,  so  that 
in  reality  the  mortgagor  is  paying  the  tax  both  upon  the 
property  and  upon  the  mortgage  he  has  given. 

The  situation  with  corporate  property  and  the  shares 
of  stock  which  represent  that  property,  is  much  the  same 


250  OUTLINES  OF  PUBLIC  FINANCE 

as  that  of  property  and  mortgages.  The  capital  stock 
does  not  represent  taxpaying  ability  apart  from  the  prop- 
erty of  the  corporation.  If  the  property  of  individuals  is 
taxed  but  once,  it  is  apparently  unjust  to  levy  two  taxes, 
both  of  which  must  be  borne  by  the  property  of  the  cor- 
poration. 

Credit  Instruments. — Examples  of  difficulties  and  in- 
equalities which  have  arisen  from  attempts  to  tax  credit 
instruments  might  be  multiplied  indefinitely,  and  in  the 
end  the  conclusion  that  something  is  fundamentally  wrong 
with  such  a  system  would  only  be  more  strongly  verified. 
The  taxing  of  credit  instruments  emphasizes  the  personal 
rather  than  the  property  element  of  assessment.  At  the 
base,  however,  property  is  the  fundamental  criterion,  the 
factor  that  creates  the  ability  to  pay,  and  under  no  sys- 
tem of  logic  can  credit  instruments  be  justly  put  into  this 
class.  Notes  and  bonds  are  simply  evidences  of  contracts 
under  which  the  holder  has  transferred  property  for  which 
he  expects  to  receive  a  future  remuneration. 

The  issuing  of  $25,000,000,000  in  United  States  bonds 
did  not  automatically,  increase  the  taxpaying  ability  of 
the  purchasers  of  the  bonds  by  that  amount.  Neither 
will  the  payment  of  the  bonds  and  their  subsequent  de- 
struction destroy  any  wealth  or  taxpaying  ability.  Credit 
instruments  merely  represent  rights  to  a  share  in  property, 
and  their  creation  or  destruction  does  not  change  the 
amount  of  the  property.  While  there  is  much  to  be  said 
against  the  assessment  of  credit  instruments  because  of 
the  administrative  difficulties  that  arise,  the  nature  of  the 
instruments,  moreover,  indicates  that  there  is  no  logical 
basis  for  attempting  to  assess  them. 

135.  The  Personal  Property  Tax  Discriminates  Among 
Classes. — Many  state  constitutions  assert  that  all  prop- 
erty must  be  assessed  at  a  uniform  rate,  yet  such  a  con- 
spicuous violation  of  this  principle  occurs  nowhere  to  the 
extent  that  it  does  in  the  working  of  the  personal  property 
tax.  That  wholesale  evasion  occurs  is  generally  known, 


PROPERTY  TAXES  251 

but  the  perversity  of  the  situation  arises  in  that  the  eva- 
sion does  not  apply  equally  to  all  classes  of  taxpayers. 

In  the  agricultural  districts  personal  property  to  a  large 
extent  takes  a  tangible  and  visible  form — live  stock  and 
other  similar  forms  of  property  upon  which  assessments 
are  comparatively  easy  to  make.  These  items  cannot  be 
hid  as  can  the  stocks,  bonds,  and  mortgages  which  com- 
prise the  bulk  of  the  personal  property  of  the  urban  resi- 
dent. Since  little  intangible  personalty  ever  reaches  the 
assessment  roll,  the  heavier  burden  falls  upon  the  class 
with  the  larger  proportion  of  tangibles,  which,  it  is  evident, 
is  the  agricultural  class. 

It  follows  from  the  foregoing  that  an  undue  burden  is 
placed  upon  those  whose  intangible  personal  property 
does  find  its  way  to  the  assessment  roll,  whatever  the 
cause.  Estates  consisting  of  various  forms  of  intangibles 
are  frequently  placed  in  the  hands  of  trustees  to  be  used 
for  the  benefit  of  widows  and  orphans.  It  is  not  difficult 
for  the  assessor  to  place  these  upon  his  assessment  roll. 
Occasionally  people  will  be  so  scrupulously  honest  that 
the  value  of  all  household  goods,  jewelry,  bonds,  stocks, 
and  money  in  the  bank  will  be  returned  to  the  assessor. 
It  is  upon  these  classes,  then,  that  practically  the  entire 
burden  of  the  taxes  upon  intangible  personal  property 
rests.  They  are  usually  the  individuals,  moreover,  who 
are  less  able  to  bear  tax  burdens. 

General  Property  Tax  Regressive. — It  will  easily  be  seen 
from  the  foregoing  features  of  the  general  property  tax 
that  it  is  strongly  regressive  in  the  manner  in  which  it 
works  out.  A  small  amount  of  property  takes  the  form  of 
visible  personalty  or  realty,  which  is  comparatively  easily 
assessed.  As  more  property  accumulates  it  begins  to  take 
on  the  intangible  nature  which  escapes  taxation.  Not 
only  this,  but  more  effort  is  usually  exerted  by  assessors 
to  obtain  a  full  valuation  of  a  small  estate  than  in  the 
case  of  a  large  one.  A  house  and  lot  worth  $5,000,  for 
example,  is  much  more  likely  to  be  assessed  at  that  figure 


252  OUTLINES  OF  PUBLIC  FINANCE 

than  is  one  worth  $50,000  to  be  assessed  at  its  full  value. 
The  tax  rate  on  property,  then,  actually  varies  inversely 
with  the  amount  of  the  property — a  situation  which  con- 
demns the  system  from  the  standpoint  of  justice. 

136.  The  Personal  Property  Tax  Degrades  the  Morals 
of  Citizens. — The  personal  property  tax  has  been  charac- 
terized as  one  which  falls  upon  the  ignorant  and  the 
honest.  Since  such  a  small  amount  of  the  tax  is  assessed, 
the  statement  implies  that  a  large  majority  of  the  tax- 
payers are  dishonest.  That  the  system  is  one  well  de- 
signed to  lower  the  integrity  of  the  citizenship  to  the  level 
of  the  most  unscrupulous  cannot  be  denied.  The  classes 
of  property  which  are  usually  exempt  from  assessment 
have  already  been  noted,  and  it  is  often  an  easy  matter 
to  convert  otherwise  taxable  property  into  one  of  these 
forms  until  after  assessment  day.  The  temptation  to  do 
so  is  at  least  presented. 

The  widespread  dishonesty  occurs  in  the  failure  to  re- 
turn to  the  assessor  the  full  amount  of  taxable  property. 
There  is  no  possible  way  by  which  an  assessor  can  reach 
certain  classes  of  intangible  property,  and  reliance  must 
be  placed  upon  the  integrity  of  the  owner  to  return  it. 
That  very  few  make  such  returns,  even  though  oaths  are 
often  taken  to  that  effect,  is  a  matter  of  common  knowl- 
edge. Most  of  these  individuals  are  considered  exemplary 
citizens,  and  would  be  highly  incensed  if  they  were  con- 
fronted with  the  charge  of  dishonesty  and  perjury. 

The  present  situation  has  come  to  exist  largely  as  a 
weapon  of  self-defense.  Every  enlightened  citizen  recog- 
nizes the  services  of  the  state  and  is  perfectly  willing  to 
bear  his  share  of  the  burden.  His  objection  arises,  how- 
ever, when  he  is  asked  to  bear  the  burden  which  properly 
belongs  elsewhere.  Some  dishonest  individual  in  a  com- 
munity fails  to  return  his  property,  and  his  neighbors 
know  it.  This  not  only  means  that  he  is  going  to  escape 
the  tax,  but  that  it  will  be  placed  on  the  other  citizens  by 
a  higher  rate  on  the  consequently  smaller  valuation.  One 


PROPERTY  TAXES  253 

does  not  have  to  look  long  at  a  list  of  assessments,  which 
some  districts  require  to  be  published,  to  see  how  pitifully 
small  are  the  property  returns  of  some  of  the  wealthiest 
citizens. 

Imagine  the  feelings  of  a  young  college  instructor  with 
nothing  but  ordinary  furniture  and  one  salary  check  in 
the  bank,  when  he  finds  his  personal  property  assessment 
higher  than  that  of  one  of  the  leading  bankers  of  his 
community,  one  of  whose  automobiles  represents  more 
value  than  the  whole  of  the  instructor's  property.  By 
the  time  the  next  assessment  is  made  his  conscience  will 
doubtless  have  become  so  warped  that  his  furniture  will 
have  depreciated  in  value,  and  the  assessor  will  find  out 
nothing  about  the  salary  check,  even  though  the  return 
be  made  under  oath. 

The  conscience  of  most  people  rebels  at  the  thought  of 
committing  murder,  yet  nearly  everyone  will  shoot,  if  he 
has  a  chance,  as  a  measure  of  self-defense.  So  it  is  in  the 
case  of  property  valuations — men  whose  honesty  is  above 
reproach,  and  who  would  shudder  at  the  thought  of  falsi- 
fying under  oath,  repeatedly  swear  to  false  tax  returns 
with  scarcely  a  prick  of  the  conscience.  So  it  is  those 
who  are  ignorant  of  the  actual  burdens,  or  who  have  too 
great  a  degree  of  integrity  to  act  even  in  self-defense,  who 
really  bear  the  brunt  of  taxes  upon  intangible  personal 
property. 

Tax  officials  have  long  sensed  the  situation  and  have 
decried  it  in  no  uncertain  terms.  One  can  pick  up  reports 
of  boards  of  assessors  and  boards  of  tax  commissioners 
for  the  last  fifty  years,  almost  at  random,  and  find  the 
personal  property  tax  denounced  in  scathing  terms.  Such 
expressions  as  the  following  may  be  easily  found.  "The 
system  debauches  the  moral  sense."  "It  is  a  school  of 
perjury."  "The  tax  falls  upon  the  man  who  is  scrupu- 
lously honest;  upon  the  guardian,  executor,  and  trustee, 
whose  accounts  are  matters  of  public  record."  ''The  sys- 
tem has  demoralizing  and  corrupting  influences."  "The 


254  OUTLINES  OF  PUBLIC  FINANCE 

system  is  debauching  to  the  conscience  and  subversive 
of  the  public  morals — a  school  for  perjury,  promoted  by 
law."  Pages  might  be  given  to  citing  opinions  of  various 
officials,  but  the  inevitable  conclusion  would  be  the  same 
— that  the  system  has  been  a  dismal  failure. 

137.  The  General  Property  Tax  Is  Intrenched  in  the 
United  States. — When  all  these  glaring  defects  of  a  system 
are  presented,  one  immediately  inquires,  "Why  is  it  toler- 
ated?" A  number  of  explanations  might  be  given.  The 
country  has  been  new  and  prosperous,  and  the  revenue 
demands  have  not  been  an  excessive  burden  on  the  social 
income  of  the  country.  The  increase  in  land  values  has 
been  more  than  rapid  enough  to  offset  tax  burdens.  It 
has  been  difficult,  moreover,  to  get  concerted  action  among 
a  number  of  more  or  less  competing  commonwealths. 
One  state  does  not  desire  to  tax  land  and  capital  at  full 
value,  because  it  wants  to  attract  industry  to  the  state, 
nor  do  its  officials  want  to  drive  capital  from  its  borders 
to  other  states  whose  tax  inducements  are  more  favorable. 
Hence  state  legislators  have  not  always  been  overzealous 
to  increase  assessments  to  the  requirements  of  law. 

Some  of  the  devices  which  have  been  used  to  make  the 
system  more  effective  have  also  helped  to  intrench  it 
more  firmly  in  the  minds  of  the  individuals.  The  system 
of  valuing  property  for  taxation  at  only  50  or  60  per  cent 
of  actual  value  is  an  example.  The  psychological  effect 
is  that  the  property  owner  feels  that  he  is  getting  off 
lucky  by  not  having  to  pay  taxes  on  the  entire  amount. 
Then,  too,  he  generally  conceals  some  personal  property, 
and  he  feels  he  is  somewhat  ahead,  forgetting  for  the 
moment  that  others  are  doing  the  same  thing.  Many 
attempts  at  classification  of  property  have  been  voted 
down,  no  doubt,  because  the  voters  in  general  have  feared 
that  the  capitalists  were  back  of  the  measure,  or  that  the 
single  taxers  were  attempting  to  introduce  taxes  on  land. 

Modern  fiscal  literature  in  the  United  States  abounds 
with  discussions  of  the  general  property  tax,  and  it 


PROPERTY  TAXES  255 

strange  to  the  American  student  to  find  nothing  concern- 
ing it  in  the  literature  of  other  countries.  It  forms  such 
an  important  part  of  our  revenue  that  he  has  taken  it  for 
granted  that  it  is  a  universal  phenomenon.  Such,  how- 
ever, is  not  the  case,  but  it  would  have  been  much  more 
nearly  the  condition  two  centuries  ago.  Other  countries 
have  tried  the  method,  carried  it  through  its  various 
stages  of  development,  just  as  we  are  doing,  and  have 
found  it  wanting.  They  have  long  since  discarded  it  as 
a  part  of  their  real  tax  system,  and  it  is  now  only  a  part 
of  their  fiscal  history. 

In  England,  Italy,  Scotland,  France,  Germany,  and 
other  countries,  the  evolution  has  been  the  same.  First, 
taxes  were  placed  upon  land,  then  upon  other  commodi- 
ties as  they  began  to  appear;  this  was  followed  by  whole- 
sale evasions  and  inqualities,  with  the  consequent  over- 
throw of  this  form  of  tax  as  an  important  part  of  the 
fiscal  system.  The  general  property  tax  still  plays  a  minor 
role  in  a  few  countries,  but  nowhere  is  it  used  as  in  the 
United  States.  It  may  be  that  some  time  in  the  future 
we  will  profit  by  their  example,  but  at  present  European 
writers  refer  to  our  fiscal  system  as  an  antiquated  one. 

ADDITIONAL   READING 

Seligman,  Essays  in  Taxation ,  chap.  ii. 
Proceedings  of  the  National  Tax  Association,  1910,  pp. 
219-313;  1911,  pp.  333-421;   1919,  pp.  477-496. 
Reports  of  State  Tax  Commissions. 


CHAPTER  XII 

PROPERTY  TAX  REFORM 

138.  Constitutional  Provisions  Present  Difficulties. — 
Many  changes  and  suggestions  have  been  made  to  at- 
tempt to  remedy  some  of  the  evils  that  were  pointed  out 
in  the  preceding  chapter.  One  of  the  first  things  to  be 
remembered  by  those  who  are  interested  in  making 
changes  in  fiscal  systems,  is  that  they  cannot  use  a  free 
hand  in  the  matter.  In  every  case  the  provisions  of  the 
Federal  Constitution  as  well  as  the  provisions  of  the  state 
constitutions,  with  their  court  interpretations,  must  be 
considered.  The  government  of  the  United  States  is  one 
of  delegated  powers,  while  the  powers  of  the  state  govern- 
ments are  residual.  That  is,  the  Federal  Constitution 
specifically  enumerates  and  prescribes  the  activities  hi 
which  the  Federal  government  may  engage,  while  the 
states  are  free  to  enter  any  fields  of  endeavor  from  which 
they  are  not  prohibited. 

The  latitude  of  the  states  in  tax  matters  is  easily  seen 
to  be  much  broader  than  that  of  the  Federal  government. 
The  fiscal  provisions  of  the  Constitution  have  already 
been  enumerated — Congress  shall  have  power  to  lay  and 
collect  taxes,  duties,  imposts,  and  excises;  no  direct  tax 
shall  be  laid  except  in  proportion  to  the  population;  no 
tax  shall  be  laid  upon  exports;  bills  for  raising  revenue 
shall  originate  in  the  House.  These,  with  the  Sixteenth 
Amendment,  which  gives  the  power  to  levy  an  income 
tax,  constitute  the  taxing  powers  of  the  Federal  govern- 
ment. 

Court  Decisions. — The  court  interpretations,  however, 


PROPERTY  TAX  REFORM  257 

must  not  be  overlooked.  Taxes  upon  corporation  incomes 
and  inheritances,  for  example,  have  been  held  as  not 
direct,  and  consequently  do  not  need  to  be  apportioned 
in  accordance  with  population.  An  income  tax  at  the 
time  of  the  Civil  War  was  considered  constitutional,  while 
the  one  of  1894  was  held  to  exceed  the  powers  of  Congress. 
It  has  been  held,  moreover,  that  the  states  have  no  power, 
by  taxation  or  otherwise,  to  retard,  impede,  burden,  or 
in  any  other  manner  control  the  operation  of  the  constitu- 
tional laws  enacted  by  Congress.  Consequently  taxes 
upon  operations  which  will  hinder  the  activities  of  the 
Federal  government  have  been  held  void.  State  laws 
which  imposed  taxes  upon  United  States  bonds,  for  ex- 
ample, have  been  declared  unconstitutional,  as  interfering 
with  the  prerogatives  of  the  Federal  government.  Like- 
wise it  has  been  held  that  the  Federal  government  has  no 
power  to  tax  the  instrumentalities  or  property  of  the 
states. 

The  Fourteenth  Amendment. — The  Fourteenth  Amend- 
ment to  the  Constitution  has  also  developed  an  important 
bearing  upon  taxation.  The  clause,  "nor  shall  any  state 
deprive  any  person  of  life,  liberty,  or  property  without 
due  process  of  law,"  is  frequently  invoked  in  tax  matters. 
The  importance  of  this  lies  in  the  interpretation  the  courts 
place  upon  the  phrase,  "due  process  of  law."  This  has 
frequently  been  invoked  to  prevent  or  annul  the  arbitrary 
assessment  and  collection  of  taxes,  and  to  require  that  all 
taxes  be  levied  through  the  general  process  of  legislation. 

Limitations  by  States. — State  legislatures,  because  of  the 
residual  nature  of  their  powers,  are  not  limited  in  the  field 
of  their  activities  except  as  restrictions  are  placed  upon 
them  by  the  Federal  or  state  constitutions.  The  limita- 
tions found  in  the  state  constitutions,  however,  have  not 
only  been  rather  widespread,  but  have  frequently  been 
barriers  to  securing  needed  tax  reforms.  Most  of  the  con- 
stitutions were  formed  when  the  entire  reliance  for  rev- 
enue was  placed  upon  property,  while  the  property  was 


258  OUTLINES  OF  PUBLIC  FINANCE 

largely  of  tangible  nature.  The  idea  prevailed  that  this 
property  represented  the  best  basis  for  taxpaying  ability, 
and  that  it  should  all  be  taxed  equally. 

Uniform  Tax  Clause. — Because  of  the  importance  at- 
tached to  property,  the  " uniform  tax  clause/'  as  it  is 
generally  known,  found  its  way  into  many  state  constitu- 
tions. It  generally  takes  a  form  somewhat  as  follows:  all 
properly  shall  be  assessed  at  its  full  value  and  at  rates  that 
are  just  and  uniform.  With  the  development  of  various 
classes  of  property,  especially  a  large  class  of  intangible 
property,  the  uselessness  of  attempting  to  assess  all  forms 
at  a  full  value,  and  consequently  tax  them  at  a  uniform 
rate,  becomes  apparent.  Some  states  have  been  able  to 
remove  the  restriction,  but  in  many  it  still  remains  be- 
cause of  the  fear  of  the  citizens  that  if  classification  of 
property  were  allowed  some  classes  of  property,  whose 
owners  possess  political  influence,  would  escape  taxes. 
Mere  indifference  has  also  had  an  influence  in  many  cases. 

139.  Attempts  Have  Been  Made  to  Correct  Inequalities 
of  Real  Estate  Assessments. — One  of  Adam  Smith's 
canons  of  taxation  is  that  taxes  shall  be  certain  and  not 
arbitrary.  We  have  gone  far,  as  has  been  previously 
noted,  in  constitutional  attempts  to  enforce  this  ideal.  In 
practice,  however,  much  arbitrariness  has  been  found 
from  the  beginning  because  of  the  difficulty  in  the  admin- 
istration of  the  tax  laws.  The  administration  is  usually 
left  in  the  hands  of  local  officials,  who  are  seldom  adverse 
to  catering  to  the  good  will  of  their  constituency.  No  way 
is  more  sure  of  winning  popular  favor,  moreover,  than 
through  the  curtailment  of  the  burden  of  taxes  that  the 
individual  believes  he  would  otherwise  have  to  pay.  The 
result  has  been  that  many  assessments  have  been  arbi- 
trarily made  by  the  assessor  in  order  to  gain  or  maintain 
popular  favor.  As  industry  has  grown  more  complex, 
the  possibilities  of  these  arbitrary  assessments  have  also 
grown. 

At  first  thought  one  would  think  that  little  chance 


PROPERTY  TAX  REFORM  259 

exists  for  arbitrary  assessments  in  the  case  of  real  estate, 
since  it  is  visible,  and  since  comparisons  can  easily  be  made 
between  different  parcels.  Selling  prices,  also,  are  gen- 
erally known  and  can  be  used  as  a  basis  for  assessment. 
Many  arbitrary  assessments  still  result,  however,  espe- 
cially in  the  large  cities.  Here  values  are  likely  to  fluc- 
tuate rapidly  and  unexpectedly,  so  that  to  actually  value 
the  property  really  becomes  the  business  of  an  expert — • 
a  qualification  that  assessors  seldom  possess.  All  they 
can  hope  to  do,  even  in  a  conscientious  performance  of 
their  duties,  is  to  use  their  best  guess,  which  frequently 
happens  to  be  far  from  the  actual  value. 

Equalization  Boards. — From  the  earliest  times  the  in- 
equalities and  injustices  which  have  arisen  from  real 
estate  assessments  have  not  continued  unnoticed  and 
with  no  attempts  to  make  corrections.  One  of  the  earliest 
plans  to  secure  a  just  assessment  was  to  have  a  review 
and  equalization  of  assessments  by  a  board  higher  up 
than  the  local  assessors.  That  the  need  was  recognized 
early  is  indicated  by  the  fact  that  before  the  end  of  the 
Revolution  an  appeal  was  made  to  the  Governor  of  New 
York  to  provide  some  method  for  equalizing  assessments. 
From  this  early  date  to  the  present  time  the  equalization 
of  assessments  has  been  used  extensively  in  an  attempt  to 
secure  greater  equality  and  justice. 

Modern  equalization  boards  are  of  two  kinds — those 
that  equalize  assessments  within  a  county,  or  the  county 
equalization  boards,  and  those  that  equalize  assessments 
among  counties,  or  the  state  equalization  boards.  City 
equalization  boards  sometimes  exist  and  possess  a  varying 
degree  of  power. 

The  state  equalization  board,  which  exists  in  some  form 
in  more  than  three  fourths  of  the  states,  usually  has  no 
power  to  change  individual  assessments,  but  only  to  make 
more  equitable  adjustments  between  counties.  In  a  few 
cases  individual  adjustments  can  be  made.  The  state 
board  is  usually  comparatively  free  from  political  in- 


260  OUTLINES  OF  PUBLIC  FINANCE 

fluence,  but  the  magnitude  of  its  task  precludes  any 
entirely  satisfactory  distribution  of  tax  burdens. 

The  county  equalization  board  has  a  widespread  exist- 
ence, and  varies  in  the  degree  of  its  efficiency.  The 
powers  are  so  limited,  frequently,  that  any  possible  effec- 
tiveness in  accomplishing  the  desired  results  is  destroyed. 
Local  politics  and  conditions,  combined  with  personal 
favoritism,  have  had  so  much  influence,  in  general,  that 
the  accomplishments  have  not  been  what  justice  would 
demand. 

Other  Attempts. — Another  remedial  measure  that  has 
been  attempted  is  to  make  the  assessor  an  appointee  of 
some  central  authority,  thus  removing  the  influence  of 
local  politics.  The  extension  of  his  tenure  of  office  for  a 
period  long  enough  so  that  he  can  attain  some  degree  of 
efficiency,  has  also  been  adopted  in  some  localities.  Some 
states  have  inaugurated  the  policy  of  holding  conferences 
for  assessors  in  order  that  they  may  have  the  advice  of 
others  in  the  same  work  as  well  as  the  benefit  of  their 
experience.  As  a  whole,  however,  little  has  been  accom- 
plished in  mitigating  the  evils  of  inequalities  in  assessing 
real  estate. 

Progress  in  Cities. — Assessments  in  cities  are  peculiarly 
difficult  because  of  the  enormous  and  rapidly  changing 
values.  Some  city  officials  have  sensed  this  situation  to 
such  an  extent  that  definite  methods  of  assessment  have 
been  adopted.  Tax  maps  are  constructed  that  show  the 
exact  size  and  location  of  each  parcel  of  land.  Some  unit 
value  is  hit  upon  as  a  standard  of  measurement,  as  so 
much  for  a  front  foot.  With  this  unit  of  value  in  mind 
definite  variations  are  made  for  distance  from  the  main 
street,  the  depth  of  the  lot,  and  other  factors  that  defi- 
nitely affect  values.  A  number  of  cities  have  even  called 
in  experts  in  valuation  to  aid  in  placing  a  proper  assess- 
ment on  property.  The  merit  of  such  plans  has  been  in 
their  uniformity  and  in  the  divorcing  of  the  assessments 
from  the  guesswork  of  the  assessors.  The  movement 


PROPERTY  TAX  REFORM  261 

toward  the  separate  assessment  of  land  and  buildings  in- 
dicates that  the  general  adoption  of  this  method  would 
aid  materially  in  obtaining  a  just  assessment  of  these  two 
classes  of  real  estate. 

140.  Many  Devices  Are  Used  in  Personal  Property  As- 
sessments.— Because  of  the  difficulties  that  have  attended 
the  assessment  of  personal  property,  many  methods  of 
securing  better  results  have  been  suggested,  and  some 
have  been  tried.  Such  suggestions  as  the  classification  of 
property,  the  separation  of  state  and  local  revenues,  and 
the  centralization  of  authority  will  be  treated  under 
separate  topics.  To  mention  all  the  devices  that  have 
been  used  or  suggested  in  the  different  taxing  districts 
would  be  next  to  impossible.  Only  a  few  will  be  noted  as 
suggestive  of  some  of  the  attempts  to  make  the  assessment 
of  personal  property  successful. 

Use  of  Oaths  and  Penalties. — As  was  indicated  in  the 
discussion  of  the  local  assessor,  the  law  often  places  strong 
reliance  upon  the  use  of  the  oath  to  accomplish  the  proper 
assessment  of  property.  The  following  requirements  of 
the  state  of  Illinois  are  typical  of  the  requirements  of  many 
other  states.  The  assessors  are  required  to  take  the  fol- 
lowing oath: 

I  do  solemnly  swear  (or  affirm)  that  I  will  support  the  Constitution 
of  the  United  States  and  the  Constitution  of  the  state  of  Illinois,  and 
that  I  will  faithfully  discharge  all  the  duties  of  the  office  of  assessor, 
deputy  assessor,  or  supervisor  of  assessments  (as  the  case  may  be)  to 
the  best  of  my  ability;  that  I  will  without  fear  or  favor  appraise  all 
the  property  in  said  county  at  its  fair  cash  value,  said  value  to  be 
ascertained  at  what  the  property  would  bring  at  a  voluntary  sale  in 
the  due  course  of  business  and  trade;  and  that  I  will  assess  said 
property  when  so  appraised  at  one  half  its  said  cash  value;  that  I  will 
cause  every  person,  company,  or  corporation  assessed,  to  sign  his,  her, 
or  its  assessment  schedule,  and  I  will  administer  to  each  and  every 
person  so  signing  said  assessment  schedule,  the  oath  thereon,  and 
return  said  schedule  so  signed  and  file  the  same  with  the  county  clerk. 

The  Illinois  law  provides  for  the  following  penalties: 
If  any  assessor  refus.es  or  knowingly  neglects  to  perform 


262  OUTLINES  OP  PUBLIC  FINANCE 

any  duty  required  of  him  by  law,  or  if  he  consents  to  any 
evasions  of  the  law  whereby  any  property  required  by 
law  to  be  assessed  shall  be  exempted  or  valued  at  less 
than  required  by  law,  he  shall,  upon  conviction,  be  fined 
for  each  offense  not  less  than  $100  nor  more  than  $5,000, 
and  shall  be  imprisoned  in  the  county  jail  not  exceeding 
one  year,  or  shall  be  both  fined  and  imprisoned.  Anyone 
who  evades  the  law  in  regard  to  the  assessment  of  property 
or  who  delivers  a  false  list  to  the  assessor,  shall  be  pun- 
ished by  a  fine  not  to  exceed  $5,000  or  by  imprisonment 
in  the  county  jail  not  to  exceed  one  year,  or  both.  Yet 
the  public  treasuries  are  not  being  filled  with  fines  from 
assessors  and  property  owners,  neither  are  they  crowding 
the  county  jails.  A  glance  at  the  figures  for  property 
valuations,  moreover,  would  immediately  convince  one 
that  it  is  not  because  the  requirements  of  the  law  are  being 
enforced. 

Other  Methods. — Some  attempts  have  been  made  to 
divorce  the  assessors  and  equalization  boards  from  local 
politics  and  influences,  and  to  give  the  assessors  broader 
powers  in  locating  property.  To  have  no  political  interest 
between  the  assessor  and  the  assessed  is  of  course  an  ad- 
vantage, since  no  office  is  then  at  stake.  Some  plan 
should  be  followed,  however,  to  insure  that  the  assessors 
and  members  of  the  equalization  boards  will  be  efficient 
and  capable  men.  This,  of  course,  could  not  hope  to  solve 
the  difficulties  in  reaching  intangible  values. 

The  powers  of  assessors  have  often  been  extended  in 
order  to  enable  them  to  better  reach  intangible  property 
values,  and  just  as  often  have  the  results  been  unsatis- 
factory. It  is  sometimes  attempted  to  enlist  the  aid  of 
citizens  in  securing  just  assessments.  One  state  requires 
the  publication  of  the  entire  assessment  list,  so  that 
everyone  may  know  the  assessed  value  of  the  property 
of  everyone  else.  The  hope  that  discrepancies  would  be 
reported,  however,  has  not  been  realized. 

Ohio  Tax  Inquisitor  Law. — One  of  the  most  commonly 


PROPERTY  TAX  REFORM  263 

cited  examples  of  the  attempt  to  enlist  citizens  in  the 
securing  of  accurate  assessments  is  what  has  been  called 
the  Ohio  tax  inquisitor  law.  Under  this  law  anyone  could 
report  property  that  he  thought  had  not  been  listed  with 
the  assessor.  If  this  proved  to  be  true,  a  50  per  cent 
penalty  was  added,  a  part  of  which  was  to  go  to  the 
individual  who  made  the  report.  The  result,  however, 
was  unsatisfactory,  and  little  was  accomplished  in  secur- 
ing more  accurate  assessments  of  personal  property.  The 
result  of  every  attempt  to  reach  intangible  property 
values,  moreover,  has  been  much  the  same. 

141.  Classification  of  Property  for  Taxation  Has  Been 
Attempted. — The  restrictions  imposed  by  constitutions 
have  been  particularly  troublesome  where  attempts  have 
been  made  to  treat  classes  of  property  differently  in  order 
to  equalize  more  nearly  the  tax  burden.  The  results  of 
property  taxation  have  demonstrated  that  a  general,  uni- 
form system  of  taxing  property  is  no  longer  practical,  and 
that,  under  modern  conditions,  it  cannot  be  enforced 
equitably  or  effectively.  The  so-called  uniform  tax  is 
based  on  the  theory  that  every  form  of  property,  regard- 
less of  character  or  condition,  shall  be  taxed  in  proportion 
to  value  and  by  a  uniform  method  and  rate.  The  theory 
presupposes  that  all  property  is  able  to  bear  the  same 
burdens  and  that  all  forms  of  property  are  equally  easy 
for  the  assessor  to  find  and  to  estimate  their  values.  Uni- 
formity of  valuation  is  an  imperative  requirement.  All 
property  must  be  assessed  at  the  same  percentage  of  ac- 
tual values,  so  that  each  class,  with  a  uniform  tax  rate, 
will  bear  its  just  proportion  of  the  burden.  No  possi- 
bility exists,  under  modern  conditions,  even  to  approxi- 
mate this  result. 

Court  Interpretation. — It  has  been  found  possible,  where 
permissible,  to  approach  more  nearly  a  uniformity  in  tax 
burdens  on  property  by  varying  the  method  of  assessment 
and  taxation  for  the  different  classes.  The  Supreme  Court 
of  the  United  States  has  consistently  held  that  this  prin- 


264  OUTLINES  OF  PUBLIC  FINANCE 

ciple  of  classifying  property  for  purposes  of  taxation  does 
not  violate  any  principle  of  the  Federal  Constitution. 
The  line  of  reasoning  has  been  somewhat  as  follows: 
diversity  of  taxation,  both  with  respect  to  the  amount 
imposed  and  the  various  species  of  property  selected, 
whether  for  bearing  tax  burdens  or  being  exempt  from 
them,  is  not  inconsistent  with  a  perfect  uniformity  and 
equality  of  taxation  in  the  proper  sense  of  these  terms. 
A  system,  moreover,  which  imposes  the  same  tax  upon 
every  species  of  property,  irrespective  of  its  nature,  or 
condition,  or  class,  will  be  destructive  of  the  principles 
of  uniformity  and  equality  in  taxation  out  of  a  first 
adaptation  of  property  to  its  burden.  State  courts,  how- 
ever, have  generally  been  much  narrower  in  their  inter- 
pretation of  the  constitution  or  statute  providing  for  uni- 
form assessment. 

Status  of  Classification. — Much  interest  has  been  shown 
in  recent  years  in  the  classification  of  property  for  tax 
purposes.  In  not  every  state  where  the  constitution  per- 
mits this  feature,  however,  is  classification  used.  Colorado 
furnishes  an  example  of  this  situation,  which  illustrates 
an  exception,  however,  rather  than  the  rule.  A  provision 
was  placed  in  the  constitution  of  1876  which  permitted 
the  legislature  to  classify  property  for  tax  purposes.  As 
yet  there  has  appeared  little  disposition  on  the  part  of 
the  legislature  to  provide  for  a  classification  of  property. 
This  is  probably  on  account  of  the  small  amount  of  in- 
tangible property  which  appears  in  this  state.  On  the 
other  hand,  in  more  than  a  dozen  states,  where  classifica- 
tion of  property  is  allowed,  experiments  looking  to  a 
greater  equality  of  assessment  are  being  carried  on,  while 
a  number  of  states  which  are  not  allowed  the  privilege  of 
classification  are  seeking  to  obtain  it. 

Principle  of  Classification. — The  outstanding  idea  in 
the  principle  of  classification  is  to  place  a  distinctly  lower 
rate  of  tax  on  intangible  property  than  upon  other  forms. 
This  is  because  it  has  been  clearly  demonstrated  that  an 


PROPERTY  TAX  REFORM  265 

imposition  of  the  general  tax  rate  upon  this  class  of  prop- 
erty drives  a  large  majority  of  it  into  hiding,  and  it  is  not 
reached  at  all.  Tangible  property,  moreover,  is  so  fre- 
quently assessed  at  only  a  fraction  of  its  true  value,  that 
a  lower  rate  is  needed  on  the  intangible  property  to  secure 
equality,  since  much  of  this  must  be  assessed  at  full  value 
when  it  is  found. 

Results  of  Classification. — The  general  experience  of  the 
states  which  have  tried  to  reach  intangibles  through  lower 
rates  has  been  satisfactory.  The  results  are  not  that 
perfection  has  been  reached,  but  that  a  decided  improve- 
ment has  resulted.  The  number  of  property  owners  as- 
sessed has  increased  materially,  as  well  as  the  amount  of 
property,  and  in  some  cases  the  actual  revenue  obtained 
has  been  greater  than  before  the  tax  rate  was  lowered. 
The  results  would  indicate  that  the  conscience  of  tax- 
payers varies  inversely  with  the  tax  rate. 

Taxation  of  Mortgages. — One  class  of  personal  property 
that  has  generally  escaped  taxation  under  the  property 
tax  is  mortgages  on  real  estate.  A  number  of  plans  have 
been  used  to  attempt  to  remedy  this  evil.  Some  states 
have  taxed  the  land  at  full  value  and  levied  only  a  low 
rate  on  mortgages,  with  the  hope  that  more  mortgages 
would  be  given  in  to  the  assessor.  Others  have  allowed 
the  land  owner  to  deduct  the  amount  of  the  mortgage 
from  the  assessed  value  of  the  land,  but  because  of  the 
general  underassessment  of  land,  the  amount  of  the  mort- 
gage has  frequently  exceeded  the  entire  assessed  value  of 
the  land.  Still  others  have  given  up  the  attempt  to  col- 
lect any  tax  from  mortgages  except  a  nominal  tax  at  the 
time  of  recording.  In  spite  of  the  apparent  injustices, 
however,  most  states  attempt  to  tax  both  the  mortgagor 
and  the  mortgagee. 

New  York  Mortgage  Recording  and  Secured  Debts  Tax. — 
The  state  of  New  York,  in  1906,  through  the  enactment  of 
the  mortgage  recording  tax,  gave  legal  recognition  to  the 
fact  that  mortgages  generally  escape  taxation.  This  law 


266  OUTLINES  OF  PUBLIC  FINANCE 

removes  mortgages  from  the  general  property  tax  and  sub- 
stitutes a  tax  to  be  paid,  once  for  all,  at  the  time  the 
mortgage  is  recorded.  The  rate  is  five  dollars  on  the 
thousand  dollars,  irrespective  of  the  term  of  the  mortgage. 
The  next  extraction  from  the  application  of  the  general 
property  tax  was  the  secured  debts,  which  came  in  1911. 
The  holders  of  these  instruments  could  secure  immunity 
from  all  future  taxes,  no  matter  what  the  length  of  life  of 
the  security,  by  presenting  it  to  the  comptroller  of  the 
state,  paying  a  tax  of  five  dollars  on  the  thousand  dollars, 
and  having  stamps  affixed  to  indicate  that  the  tax  had 
been  paid.  This  was  unsatisfactory  because  of  the  un- 
equal rate  which  resulted  on  securities  of  different  dates 
of  maturity,  and  the  low  return  which  really  came  to  the 
state  when  the  time  element  was  considered.  Several 
amendments  were  tried,  and  the  final  result  was  the  in- 
vestment tax  law  of  1917.  Under  this  secured  debts  are 
taxed  annually  by  the  state  at  the  rate  of  two  dollars  per 
thousand  dollars.  The  tax  may  be  paid  for  one,  two, 
three,  four,  or  five  years,  but  for  no  longer  period. 

Other  Examples  of  Classification. — Pennsylvania  and 
Connecticut  have  both  used  the  principles  of  classifica- 
tion with  interesting  results.  A  few  years  ago  Pennsyl- 
vania reduced  the  rate  of  taxation  on  intangible  property 
to  a  small  fraction  of  what  it  had  been,  and  for  the  next 
year  received  more  revenue  from  this  source  than  for  the 
preceding  year  with  the  higher  rate.  It  appears  that  the 
new  rate  was  not  high  enough  to  sear  the  consciences  of 
the  owners  of  intangible  property. 

Connecticut  has  a  voluntary  registration  of  bonds, 
notes,  and,  in  fact,  practically  every  form  of  taxable  in- 
tangible property,  with  the  state  treasurer.  A  tax  is  paid 
upon  this  registered  property  at  the  rate  of  four  mills  a 
year.  The  attached  treasurer's  receipt  exempts  from  all 
other  taxes.  If  the  document  is  not  registered  it  is  sub- 
ject to  taxation,  if  found,  at  the  local  rates,  which  are 
much  higher  than  the  state  rate  of  four  mills. 


PROPERTY  TAX  REFORM  267 

The  use  of  the  system  of  classification  is  but  another 
attempt  to  make  a  success  of  the  property  tax.  At  pres- 
ent it  is  but  in  its  experimental  stage,  but  a  strong  agita- 
tion and  extensive  program  of  education  is  being  carried 
on  to  secure  a  wider  adoption.  It  is  likely  that  the  future 
will  bring  a  much  more  extensive  use  of  the  principle,  but 
whether  it  will  satisfactorily  solve  the  problem  of  taxa- 
tion of  property  remains  to  be  seen. 

142.  Limitations  Have  Been  Placed  upon  Tax  Rates 
and  Borrowing  Power. — The  rapid  increase  in  public  ex- 
penditures, especially  on  the  part  of  cities,  has  been  viewed 
with  alarm  by  the  taxpaying  citizenship.  Charges  of 
graft,  recklessness,  inefficiency,  and  general  lack  of  eco- 
nomical methods  have  been  frequent.  The  rapidly  in- 
creasing tax  burden,  because  of  this  enormous  growth  in 
expenditures,  has  led  to  many  demands  that  something 
be  done  to  curb  the  power  of  the  assessing  and  taxing 
officials.  In  some  states  attempts  have  been  made  to 
curb  this  supposed  extravagance  of  municipal  and  even 
of  state  officials.  The  most  common  method  of  proce- 
dure is  to  place  some  constitutional  or  statutory  limitation 
upon  the  amount  of  revenue  a  city  may  secure.  The 
amount  of  a  city's  indebtedness,  also,  has  been  closely 
guarded,  and  provision  has  been  made  to  limit  the  fiscal 
activities  of  some  state  legislatures. 

The  most  used  limitations  upon  the  fiscal  powers  of 
municipal  authorities  is  to  impose  a  fixed  or  limited  tax 
rate  with  provisions  for  securing  increased  funds  to  meet 
emergencies.  Not  only  has  it  been  thought  that  this  sort 
of  restriction  would  curb  wasteful  expenditure,  but  that 
a  limited  rate  of  taxation  would  be  an  incentive  for  list- 
ing a  larger  amount  of  the  intangible  personal  property. 
Experience  has  shown,  however,  that  no  very  startling 
results  have  been  obtained  in  bringing  this  class  of  prop- 
erty from  hiding. 

Methods  of  Tax  Limitation.- — The  use  of  a  fixed  tax  rate 
for  municipalities  has  not  proved  satisfactory  since  there 


268  OUTLINES  OF  PUBLIC  FINANCE 

is  no  definite  relation  between  a  city's  property  and  its 
necessary  activities.  Besides,  some  cities  may  be  under- 
taking more  legitimate  enterprises  than  others,  which 
will  necessarily  entail  greater  expenditures.  If  the  fixed 
rate  is  higher  than  is  necessary  it  will  lead  to  extrava- 
gance, waste,  and  graft,  while  if  it  proves  to  be  too  small 
it  will  result  in  the  restriction  of  necessary  activities,  an 
increase  of  borrowing  where  this  is  possible,  or  the  exten- 
sion of  the  revenue  system  to  include  unproductive  or 
undesirable  sources. 

As  a  substitute  for  the  fixed  rate,  a  limited  tax  rate  has 
sometimes  been  used.  This  plan  allows  an  increase  in 
the  rate,  but  not  to  exceed  a  certain  percentage  of  the  rate 
for  the  preceding  year.  This,  however,  is  only  more 
satisfactory  than  the  fixed  rate,  for  if  the  limitation  is  the 
same  for  all  cities  in  a  state,  it  is  attempting  to  place  a 
uniform  standard  upon  needs  which  vary  greatly.  In 
neither  case  is  there  any  guarantee  that  the  burdens  upon 
property  will  be  kept  down  because  authorities  can  resort 
to  increased  assessments  to  swell  the  revenue.  A  more 
effective  method  of  real  limitation  is  to  allow  only  a  cer- 
tain increase  in  expenditure  over  a  preceding  year,  or  the 
average  of  several  preceding  years.  Neither  the  tax  rate 
nor  property  valuations  can  be  juggled  to  offeet  the  in- 
tended restrictions. 

The  limitation  on  indebtedness  usually  takes  the  form 
of  allowing  bond  issues  to  only  a  definite  percentage  of 
the  property  valuation,  and  this,  frequently,  only  upon 
popular  vote.  In  any  system  of  limitation  some  provision 
for  flexibility  should  be  made  to  allow  for  emergencies,  or 
for  various  forms  of  capital  investments  which,  of  course, 
should  be  put  into  a  different  category  from  current 
expenses. 

Many  municipalities  are  finding  themselves  pressed  for 
funds  because  of  the  limitations  which  have  been  placed 
upon  them.  The  increased  costs  of  labor  and  materials 
have  more  than  outstripped  the  possible  revenue  increases 


PROPERTY  TAX  REFORM  269 

from  the  existing  sources,  while  the  decrease  caused  by 
canceled  liquor  licenses  has  often  been  keenly  felt.  In- 
debtedness has  frequently  been  increased  to  the  limit, 
and  the  only  recourse  has  been  to  seek  new  sources  for 
funds.  The  course  most  generally  pursued  has  been  to 
increase  the  use  of  license  taxes,  as  upon  vehicles,  and 
professions. 

Ohio  Plan  of  Limitation. — Ohio  furnishes  one  of  the  best 
examples  of  state  tax  limitation.  According  to  the  law 
a  maximum  of  fifteen  mills  is  placed  for  the  aggregate  of 
all  levies,  while  a  limitation  of  ten  mills  applies  to  all 
levies,  except  to  those  authorized  by  a  vote  of  the  people, 
and  those  necessary  to  provide  interest  and  a  sinking  fund 
for  indebtedness.  The  limitation  extends  to  the  minor 
political  divisions  in  that  the  maximum  levies  of  the 
county,  municipality,  township,  and  school  district  are 
placed,  respectively,  at  three,  five,  five,  and  two  mills. 
These  levies,  however,  are  exclusive  of  any  special  levies 
which  the  citizens  may  vote.  Little  satisfaction  and  much 
criticism  have  been  expressed  concerning  the  working  of 
the  plan. 

143.  The  Separation  of  Sources  of  Revenue  Has  Been 
Advocated. — The  complexities  and  evils  of  modern  tax 
systems  have  led  many  to  desire  and  to  seek  for  better 
things.  One  cause  for  the  difficulties  has  been  the  attempt 
of  different  political  divisions  to  secure  funds  by  levying 
taxes  upon  the  same  bases.  This  has  led  to  evasion  of 
payments — particularly  those  in  which  the  individual  has 
not  been  visibly  and  closely  interested.  One  reason  for 
the  reluctance  of  individuals  to  turn  in  their  property  to 
the  assessor  has  been  that  a  part  of  the  tax  collected 
would  be  expended  in  a  distant  part  of  the  state  where 
no  benefits  would  accrue  to  the  payer.  Another  difficulty 
has  grown  up  through  the  attempt  of  local  officials  to 
assess  properties,  the  nature  of  which  caused  them  to 
extend  far  beyond  the  limits  of  any  one  jurisdiction.  A 
remedy  for  some  of  these  difficulties  that  has  been  much 


270  OUTLINES  OF  PUBLIC  FINANCE 

discussed  in  recent  years  is  that  state  and  local  revenues 
should  be  derived  from  separate  sources. 

Advantages  of  Separation. — On  the  face  of  the  proposi- 
tion some  outstanding  advantages  present  themselves. 
It  is  evident  that  certain  fields  of  resources  are  much  more 
suited  to  the  cultivation  of  the  state  than  of  local  units. 
The  first  example  which  presents  itself  is  the  large  class  of 
corporations  which  are  much  more  nearly  organizations 
of  the  state  than  of  any  locality.  The  complexities  and 
nature  of  their  business  is  such  as  to  require  assessors  of 
a  much  higher  degree  of  skill  than  local  districts  can  afford 
to  provide.  It  has  been  advocated  that  the  assessment 
of  the  property  of  corporations  should  be  taken  from  the 
locality  and  turned  over  to  the  state.  The  inheritance 
tax  is  another  source  of  revenue  which  is  adapted  to  the 
use  of  states  rather  than  to  the  use  of  localities.  In  the 
first  place,  localities  do  not  possess  the  machinery  to  ad- 
minister the  tax  satisfactorily,  and  in  the  second  place,  in 
a  small  area,  no  reliance  can  be  placed  upon  enough  trans- 
fers of  property  occurring  within  a  given  time  to  insure  a 
stable  revenue.  Within  a  larger  district  this  stability  can 
be  counted  upon  with  a  reasonable  degree  of  certainty. 
A  large  number  of  license  taxes,  also,  can  be  more  efficiently 
handled  through  state  machinery  than  through  that  of 
localities.  It  seems  reasonable,  then,  that  these  sources 
of  revenue  could  be  profitably  turned  over  to  the  state. 

If  the  state  be  given  the  revenues  from  corporations, 
inheritances,  and  certain  licenses,  it  would  be  possible  to 
relieve  the  localities  from  contributing  to  the  support  of 
the  state  from  revenues  which  are  collected  by  local 
officials.  There  would  be  no  state  tax  to  be  collected, 
consequently  there  would  be  no  particular  advantage  for 
the  inhabitants  of  one  district  to  secure  a  lower  percentage 
valuation  than  in  adjoining  ones,  for  it  could  not  reduce 
the  tax  burden,  but  merely  affect  the  rate.  It  would  give 
the  localities,  moreover,  a  much  greater  autonomy  in  de- 
termining fiscal  policies. 


PROPERTY  TAX  REFORM  271 

Dangers  of  Separation. — There  is  no  doubt  that  the 
revenue  systems  of  state  and  localities  have  been  too 
closely  interrelated,  and  that  some  degree  of  separation 
would  prove  beneficial.  An  entire  divorce  of  the  two, 
however,  with  absolute  local  autonomy  in  determining 
fiscal  policies  which  the  most  ardent  advocates  desire,  is 
fraught  with  dangers,  and  would  not,  perhaps,  accomplish 
all  that  is  hoped. 

It  is  desirable  to  have  some  uniformity  in  the  raising  of 
local  revenues,  even  if  no  part  of  the  revenue  is  to  go  out- 
side of  the  district.  Local  fiscal  officials,  moreover,  would 
not  always  be  competent  to  decide  what  plans  would  be 
feasible  to  adopt.  The  use  of  an  income  tax  as  the  base 
of  revenue  in  one  township,  for  example,  while  the  adjoin- 
ing township  used  property,  would  either  impose  double 
taxes  or  exempt  entirely  an  individual  who  owned  prop- 
erty in  one  township  and  lived  in  the  other.  Other  rea- 
sons exist,  moreover,  for  unequal  assessments  than  be- 
cause a  part  of  the  revenue  collected  locally  goes  to  state 
purposes.  The  local  assessor,  under  the  plan  of  separa- 
tion, would  still  be  an  elected  official,  and  the  same  rea- 
sons for  showing  favoritism  would  continue  to  exist. 
While  a  separation  of  revenues  may  be  desirable  to  some 
extent,  the  local  units  should  still  be  kept  under  central 
supervision  to  the  extent  that  some  uniformity  remain  in 
local  fiscal  methods.  They  should  also  be  restrained  from 
experimenting  with  systems  which  are  not  adapted  to 
their  need. 

The  absolute  separation  of  sources  of  revenue  possesses 
the  added  danger  of  leading  to  parsimony  or  extrava- 
gance. Take,  for  example,  the  states  which  rely  almost 
entirely  upon  revenues  from  corporations.  If  these  enter- 
prises be  powerful  in  the  state,  and  have  a  controlling 
influence  with  the  legislature,  expenditures  will  be  reduced 
to  the  minimum,  and  many  desirable  public  activities  may 
be  thwarted  in  order  to  make  the  tax  burden  as  light  as 
possible.  As  was  previously  pointed  out,  moreover,  it  is 

18 


272  OUTLINES  OF  PUBLIC  FINANCE 

politically  undesirable  to  have  one  class  voting  the  ex- 
penditure of  funds  which  another  class  contributes,  for 
this  will  lead  to  extravagance.  If,  then,  corporations  be 
the  source  of  tax,  and  unpopular  with  the  legislature  be- 
cause it  represents  another  class  of  people,  no  amount  of 
expenditure  will  appear  to  be  too  great.  For  the  sake  of 
economy  an  absolute  divorce  may  not  be  desirable,  and 
better  results  may  be  expected  if  the  people  who  vote  the 
expenditure  of  funds  also  have  to  help  bear  the  burden. 

As  between  Federal  and  state  revenues  the  tendency 
seems  to  be  in  the  opposite  direction  from  a  separation  of 
sources.  A  few  years  ago  it  was  argued  that,  since  the 
Federal  government  had  the  field  of  customs  and  excises, 
the  states  should  have  that  of  incomes,  corporations, 
and  inheritances,  and  leave  the  returns  from  property  to 
the  localities.  More  recently,  in  spite  of  much  objection 
from  state  officials,  the  Federal  government  has  widened 
its  scope  of  sources.  Its  use  of  incomes,  corporations,  and 
inheritances  as  sources  of  revenue  has  already  been 
discussed. 

144.  The  Present  Tendency  Is  to  Centralize  Fiscal 
Authority. — The  preceding  topic  has  indicated  that  there 
is  some  demand  for  what  is  known  as  local  option,  or  home 
rule,  in  taxation — that  is,  to  allow  each  tax  district  to  be 
an  automaton  in  determining  its  fiscal  policies.  While  it 
does  not  usually  appear  in  the  public  discussion  that  this 
is  a  single  tax  measure,  yet  the  single  taxers  are  always 
ardent  advocates  for  the  adoption  of  the  principle,  with 
the  hope  that  some  locality,  when  it  has  secured  the  power 
of  acting  on  its  own  initiative,  will  adopt  the  single  tax. 

Many  of  the  arguments  which  are  presented  for  this 
decentralization  and  separation  are  appealing,  and  de- 
serve notice.  It  is  claimed  that  the  physical  and  indus- 
trial conditions  of  a  state  differ  so  widely  that  tax  methods 
which  are  suitable  to  one  locality  are  adverse  to  the  in- 
terests of  another.  In  proof  of  this,  disparity  between  the 
needs  of  farms,  villages,  and  large  cities  is  pointed  out. 


PROPERTY  TAX  REFORM  273 

Furthermore,  it  is  claimed  that  the  local  authorities,  be- 
cause of  the  intimate  knowledge  they  have  of  the  local 
affairs,  and  because  of  their  personal  interest  in  them, 
have  a  much  better  basis  upon  which  to  formulate  fiscal 
policies  than  would  officials  who  have  no  such  interests. 
The  placing  of  citizens  of  local  districts  upon  their  own 
resources,  and  allowing  them  to  work  out  their  own  salva- 
tion, will  stimulate  an  increased  interest  in  civic  and 
fiscal  affairs,  it  is  claimed. 

It  has  been  suggested  above  that  absolute  autonomy  on 
the  part  of  local  districts  presaged  an  increase  in  the  evils 
of  double  taxation.  Not  only  this,  but  it  would  open  the 
way  for  all  sorts  of  favorable  discrimination  to  particular 
industries  to  secure  location  within  the  district.  The  dan- 
gers of  giving  a  large  number  of  irresponsible  assessment 
districts  a  free  hand  to  introduce  and  experiment  with  all 
sorts  of  untried  ideas  are  too  great  to  be  accepted.  A 
certain  amount  of  freedom  is  no  doubt  desirable,  but  it 
should  be  so  curbed  and  directed  as  not  to  endanger  the 
safety  of  the  larger  body  politic. 

Equalization  of  Assessments. — The  recent  trend  for  the 
solution  of  fiscal  difficulties,  however,  has  been  toward  a 
centralization  of  authority  and  responsibility,  rather  than 
toward  a  further  decentralization.  One  factor  which  has 
caused  this  has  been  the  desire  to  secure  greater  equality 
in  the  valuation  of  property.  The  inequalities  in  assess- 
ment, which  arose  with  the  growth  of  corporate  industries, 
first  led  to  centralization.  This  was  in  reality  a  movement 
away  from  the  practically  pure  local  option  which  formed 
the  early  part  of  our  fiscal  systems.  These  discrepancies 
in  assessment  led  to  an  attempt  to  equalize  values  by  a 
central  board  appointed  for  that  purpose.  It  has  often 
been  difficult  for  this  board  to  secure  the  proper  informa- 
tion, yet  it  has  frequently  been  able  to  alleviate  much  of 
the  inequality  and  injustice  which  has  arisen  because  of 
the  incapabilities,  inconsistencies,  or  indisposition  of  local 
officials. 


274  OUTLINES  OF  PUBLIC  FINANCE 

Control  of  Assessments. — A  more  important  develop- 
ment of  centralization  has  been  the  control  which  central 
officials  exercise  over  local  ones,  especially  over  the  as- 
sessors. More  frequently,  also,  is  it  becoming  true  that 
the  assessment  district  is  being  enlarged,  and  the  assess- 
ment for  the  district  performed  by  competent  agents.  In 
many  cases  it  has  gone  so  far  that  the  central  authority 
is  found  to  be  a  state  official,  to  whom  county  supervisors 
are  held  responsible,  while  under  the  county  supervisors, 
and  responsible  to  them,  are  the  local  assessors.  In  some 
cases  the  smallest  assessing  district  has  been  made  the 
county,  and  all  the  assessments  are  made  by  the  county 
supervisor.  These  supervisors  and  assessors  are  usually 
appointed  under  civil  service  rules,  and  may  continue  in 
office  as  long  as  efficiency  warrants. 

Advantages  of  Centralization. — The  outstanding  advan- 
tages of  this  form  of  centralization  are  plain.  In  the  first 
place  the  assessor  is  divorced  from  politics.  His  position 
does  not  depend  upon  how  much  leniency  he  shows  the 
owners  of  the  assessed  property,  but  rather  upon  how  well 
he  performs  his  task.  In  the  second  place,  men  of  much 
better  qualifications  can  be  secured  through  a  process  of 
examination  of  the  capabilities  for  performing  the  tasks. 
The  system  in  use  in  New  York  City  will  illustrate  the 
possibilities.  The  assessors  are  chosen  on  the  basis  of 
competitive  examination,  the  examination  dealing  largely 
with  the  aspects  of  valuation.  The  law  requires  that  one 
out  of  the  first  three  rated  highest  in  the  examination 
must  be  appointed,  and  it  has  been  the  practice  of  the 
mayor  to  designate  that  the  appointments  must  be  made 
in  order  of  the  eligibility,  as  shown  by  the  examination. 
As  a  whole,  competent  men  have  been  chosen,  whose 
only  fear  of  losing  the  position  is  from  failure  to  per- 
form satisfactory  service.  Many  of  the  assessors  have 
been  serving  a  number  of  years,  and  have  become  more 
efficient  and  valuable  with  the  accumulation  of  experience. 

145.  The   State   Tax   Commission  Presents   the   Best 


PROPERTY  TAX  REFORM  275 

Example  of  Centralization. — The  growth  of  problems  which 
called  for  the  attention  of  central  authorities,  and  the 
general  trend  toward  this  form  of  administration,  have 
demanded  a  competent  central  organization  to  render 
the  required  services.  At  first  the  duties  were  placed  upon 
boards  already  in  existence,  with  results  which  were  far 
from  satisfactory.  The  final  outcome  has  been  that  in 
more  than  three  fourths  of  the  states  organizations  usually 
known  as  state  tax  commissions  may  be  found.  While 
an  accurate  generalization  of  their  nature  is  impossible, 
yet  it  may  be  said  that  the  boards  are  composed  of  few 
members,  usually  three,  appointed  for  a  comparatively 
long  period,  at  a  compensation  which  is  large  enough  to 
obtain  men  of  expert  knowledge  and  capabilities.  As  far 
as  possible  the  attempt  has  been  made  to  keep  political 
influences  apart  from  the  tax  commission. 

Activities  of  Commissions. — The  work  of  these  commis- 
sions has  been  so  varied  that  again  no  accurate  generaliza- 
tion can  be  made.  They  are  expected  to  form  the  balance 
wheel  of  the  fiscal  system  of  the  state — to  discover  the 
evils,  formulate  remedies,  and  induce  legislatures,  when 
this  is  necessary,  to  make  the  needed  changes  in  the  fiscal 
machinery.  The  general  supervision  has  had  a  wholesome 
effect  upon  the  activities  of  subordinate  officials,  even 
down  to  local  assessors.  The  introduction  of  the  mere 
possibility  of  supervision  at  first  had  an  exhilarating  psy- 
chic effect  which,  however,  tended  to  wear  off  with  time, 
causing  more  actual  supervision  to  become  necessary. 
The  most  marked  result  on  the  part  of  local  officials  has 
been  the  increased  and  more  uniform  assessment  of  real 
estate.  The  aid  which  has  been  given  to  local  assessors 
in  formulating  methods,  such  as  the  use  of  the  tax  map, 
has  aided  materially  in  accomplishing  this  result.  The 
extent  of  the  supervision  varies  from  mere  advisory  pow- 
ers to  absolute  control  of  all  assessments,  as  in  the  state 
of  Ohio. 

Auditing  and  Accounting. — Since  the  advent  of  the  state 


276  OUTLINES  OF  PUBLIC  FINANCE 

tax  commission,  much  progress  has  been  made  in  the  adop- 
tion of  uniform  systems  of  public  auditing  and  accounting. 
It  is  only  through  such  uniformity  that  any  accurate 
knowledge  and  comparisons  may  be  had  of  public  ex- 
penditures, and  this  is  the  basis  for  the  solution  of  fiscal 
problems.  In  a  few  cases  the  commissioners  aid  in  making 
up  the  budget  estimate,  but  this  is  as  yet  not  generally 
true.  From  their  knowledge  of  the  sources  of  revenue, 
however,  their  services  should  be  acceptable  in  helping  to 
formulate  state  budgets.  The  work  which  has  been  done 
in  auditing  and  accounting,  however,  bids  fair  to  lessen 
the  squandering  of  public  funds  and  to  prove  a  material 
saving  through  the  elimination  of  inefficient  and  wasteful 
methods. 

Corporation  Assessments. — Another  accomplishment,  for 
which  the  tax  commissions  deserve  credit,  has  been  the 
improvement  in  the  processes  for  valuing  the  various 
classes  of  corporate  property.  It  has  been  through  their 
studies  and  experiments  that  the  various  plans — gross 
earnings,  net  earnings,  ad  valorem,  and  other  plans- 
have  been  tried,  and  the  merits  and  defects  of  each  noted. 
Tax  commissioners  have  succeeded  in  creating  an  attitude 
of  respect  from  the  corporations,  because  of  the  fair  treat- 
ment they  have  extended,  which  has  been  beneficial  in 
more  ways  than  in  an  increased  revenue.  Mention  should 
be  made  of  the  valuable  contributions  to  fiscal  knowledge 
which  have  been  made  through  the  reports  of  the  various 
commissions.  Many  of  them  are  a  part  of  the  most  val- 
uable literature  on  fiscal  problems,  and  should  be  consulted 
by  students  interested  in  systems  of  state  revenue. 

146.  Taxation  of  Property  Remains  Unsatisfactory. — 
So  far  the  changes  made  in  assessing  and  taxing  property 
have  been  void  of  satisfactory  results.  If  all  the  devices 
suggested  above  were  generally  adopted,  some  of  the 
defects  of  the  present  property  tax  might  be  less  flagrant, 
yet  it  seems  doubtful  if  the  scheme  as  a  whole  can  be 
made  satisfactory.  Most  authorities  would  be  willing  to 


PROPERTY  TAX  REFORM  277 

conclude  concerning  the  general  property  tax,  as  does 
Professor  Seligman: 

The  general  property  tax  as  actually  administered  is  beyond  all  doubt 
one  of  the  worst  taxes  known  in  the  civilized  world.  Because  of  its  at- 
tempt to  tax  intangible  as  well  as  tangible  things,  it  sins  against  the 
cardinal  rules  of  uniformity,  of  equality,  and  of  universality  of  taxa- 
tion. It  puts  a  premium  on  dishonesty  and  debauches  the  public 
conscience;  it  reduces  deception  to  a  system,  and  makes  a  science  of 
knavery;  it  presses  hardest  on  those  least  able  to  pay;  it  imposes 
double  taxation  on  one  man  and  grants  entire  immunity  to  the  next. 
In  short,  the  general  property  tax  is  so  flagrantly  inequitable  that  its 
retention  can  be  explained  only  through  ignorance  or  inertia.  It  is 
the  cause  of  such  crying  injustice  that  its  alteration  or  its  abolition  must 
become  the  battle  cry  of  every  statesman  and  reformer.1 

ADDITIONAL   READING 

Seligman,  Essays  in  Taxation,  chap.  xi. 
Lutz,  The  Tax  Commission. 

Proceedings  of  the  National  Tax  Association,  1913,  pp. 
351-371;  1915,  pp.  42-77;  1919,  pp.  477-496. 

1  Seligman,  Essays  in  Taxation,  p.  62. 


CHAPTER  XIII 

INCOME  TAXES 

147.  The  Use  of  Income  Taxes  Represents  a  Developed 
Fiscal  System. — The  development  of  criteria  of  justice  in 
taxation,  with  the  general  acceptance  of  faculty  or  ability 
to  pay  as  the  most  satisfactory,  has  been  discussed.  In 
the  light  of  this  development  various  kinds  of  direct  and 
indirect  taxes  have  been  considered  with  reference  to  their 
justice,  and  it  has  been  seen  that  the  incidence  of  such 
indirect  taxes  as  customs  duties  and  excise  taxes  cannot 
be  traced  with  sufficient  accuracy  to  determine  the  real 
burden.  Taxes  upon  consumption,  moreover,  are  regres- 
sive, in  that  they  fall  more  heavily  upon  the  poorer  classes, 
and  for  this  reason  they  are  no  longer  advocated  as  the 
essential  part  of  a  tax  system. 

The  development  of  direct  taxes  to  conform  to  the  abil- 
ity to  pay  has  followed  the  changes  and  growth  in  eco- 
nomic institutions.  The  place  of  the  individual  as  the 
base  of  the  first  direct  taxes  has  already  been  pointed  out. 
Poll  taxes,  however,  conformed  to  the  requirements  of 
justice  in  only  the  primitive  stages  of  society.  Here  prop- 
erty held  a  sphere  of  minor  importance,  there  were  no 
such  distinctions  as  rich  and  poor,  and  here  also  the  char- 
acter of  the  work  of  individuals,  as  well  as  its  reward,  was 
very  much  the  same.  The  injustice  of  the  exclusive  use 
of  poll  taxes  became  apparent  as  property  began  to  occupy 
a  more  important  place  among  economic  institutions. 
The  development  of  the  use  of  property  as  a  base  for  taxes 
has  also  been  discussed,  as  well  as  the  outstanding  defects 
of  this  system  as  economic  institutions  developed  into 
their  more  diverse  and  complex  forms, 


INCOME  TAXES  279 

As  long  as  society  was  primarily  agricultural,  and  prop- 
erty consisted  almost  entirely  of  land  and  its  appurte- 
nances, a  tax  based  upon  property  could  be  made  to  con- 
form fairly  well  to  the  principles  of  justice.  We  have 
seen,  however,  that  as  property  began  to  take  on  diverse 
forms,  and  began  to  assume  varying  degrees  of  produc- 
tivity, a  general  property  tax  did  not  meet  the  require- 
ments of  justice.  The  difference  in  ability  hi  the  vari- 
ous forms  of  property  to  bear  tax  burdens,  the  develop- 
ment of  the  ability  to  bear  these  burdens  without  the 
ownership  of  property,  the  inequality  of  assessments,  and 
the  failure  to  assess  many  classes  of  property,  have  em- 
phasized the  failure  of  this  tax  to  meet  the  requirements 
of  justice. 

Most  countries  outside  of  the  United  States,  it  was 
indicated,  have  long  since  given  up  property  taxes  in  their 
search  for  some  method  which  would  more  nearly  conform 
to  faculty  under  the  modern  complex  industrial  organiza- 
tions. Some  form  of  an  income  tax  has  been  widely 
adopted  where  the  property  tax  has  been  given  up.  In 
recent  years,  also,  income  taxes  have  begun  to  play  a 
much  more  important  role  in  the  fiscal  systems  of  our 
Federal  and  state  governments.  In  the  future,  no  doubt, 
income  taxes  will  occupy  a  place  of  much  greater  promi- 
nence in  the  fiscal  systems  of  the  states,  at  least,  than 
they  have  held  heretofore. 

148.  Difficulties  Arise  in  Defining  Income. — Some  def- 
inite understanding  as  to  what  the  term  income  includes 
becomes  necessary,  since  income  taxes  are  assuming  such 
an  important  place  in  fiscal  systems.  Webster  defines  an 
income  as  "that  gain  or  recurrent  benefit,  usually  meas- 
ured in  money,  which  proceeds  from  labor,  business,  or 
property;  commercial  revenue  receipts  of  any  kind,  in- 
cluding wages  or  salaries,  the  proceeds  of  agriculture  and 
commerce,  the  rent  of  houses,  or  the  return  on  invest- 
ments." 

This  definition  suggests  some  of  the  current  ideas  which 


280  OUTLINES  OF  PUBLIC  FINANCE 

are  held  as  to  the  meaning  of  income,  but  it  does  not  in- 
dicate all  the  problems  which  arise  when  one  seeks  to 
determine  the  income  which  should  be  made  the  proper 
base  for  taxes.  The  popular  conception  of  income  is  that 
of  net  income,  yet  the  expression  is  used  frequently  to 
designate  the  larger  category  of  gross  income.  A  tax  is 
sometimes  levied  upon  net  incomes,  and  sometimes  upon 
gross  incomes,  and  in  the  case  of  the  levy  of  such  a  tax 
upon  a  corporation  it  is  customary  to  refer  to  it  as  a 
gross  or  net  income  tax,  because  there  is  no  uniformity 
as  to  which  is  used  in  the  different  states,  or  against 
various  corporations. 

Gross  and  Net  Income. — The  popular  conception  of  in- 
come is  that  of  the  net  return,  and  that  this  differs  widely 
from  gross  income  is  at  once  apparent.  In  the  case  of 
salaries  and  wages,  the  total  amount  received  is  usually 
considered  as  the  income,  but  this  does  not  hold  for  pro- 
ductive enterprises.  The  income  is  usually  considered  as 
that  which  is  left  after  expenses  are  deducted.  In  the 
case  of  manufacturers,  merchants,  or  farmers,  the  total 
receipts  might  be  large,  while  a  deduction  of  expenses 
might  leave  comparatively  little  or  nothing.  Even  a 
greater  difference  than  this  should  be  made,  perhaps,  in 
some  cases.  In  manufacturing  plants,  for  example,  the 
expenditures  for  a  particular  year  may  not  indicate  all 
that  should  be  deducted  from  the  gross  returns.  Depre- 
ciation is  in  progress,  and  provision  should  be  made  to 
take  care  of  both  depreciated  building  and  worn-out  or 
obsolete  machinery.  From  this  conception  an  income 
might  be  considered  as  any  amount  over  and  above  that 
sufficient  to  keep  the  capital  investment  intact.  To  de- 
termine this  accurately,  however,  would  be  impossible  in 
many  cases. 

Capital  and  Income. — Many  attempts  have  been  made 
to  make  a  clear  distinction  between  capital  and  income, 
yet  for  practical  purposes  most  of  the  distinctions  cannot 
be  carried  too  far.  Some  point  out  that  capital  is  a  stock 


INCOME  TAXES  281 

of  wealth,  while  an  income  is  a  flow  of  wealth.  The  re- 
ceipt of  an  inheritance,  however,  is  scarcely  to  be  classed 
as  a  part  of  an  income.  Some  would  go  farther  in  modify- 
ing the  income  concept,  and  limit  it  to  a  somewhat  regular 
flow  of  wealth,  yet  many  of  the  returns  from  dealing  on 
boards  of  trade  and  stock  exchanges  should  be  classed  as 
income,  although  the  flow  is  by  no  means  regular. 

Many  attempts  have  been  made  by  judicial  minds  to 
define  income,  capital,  and  property,  but  there  has  been 
no  more  uniformity  in  their  concepts  than  in  those  which 
others  have  tried  to  formulate.  Fiscal  authorities,  how- 
ever, are  more  concerned  about  the  concept  of  income, 
and  the  methods  of  levying  upon  it,  which  will  most  nearly 
conform  to  principles  of  justice  in  taxation. 

149.  The  Concept  of  Income  Is  Sometimes  Modified  to 
Conform  to  Justice  in  Taxation. — In  their  attempt  to  reach 
ability  to  pay  taxes  fiscal  authorities  often  make  differen- 
tiations in  incomes  which  would  not  otherwise  be  made. 
A  discussion  of  the  uniformity  of  taxation  clause,  which  is 
to  be  found  in  many  state  institutions,  will  be  found  in 
another  place,  but  the  courts  have  generally  held  that  the 
provision  does  not  prohibit  the  classification  of  property 
provided  greater  equality  of  assessment  could  be  secured 
thereby.  In  other  words,  the  contention  has  been  that  the 
constitutions  were  concerned  about  the  equality  of  bur- 
den rather  than  equality  of  assessment.  This  principle 
has  been  carried  to  income  assessments,  and  differentia- 
tions have  been  made. 

Funded  and  Unfunded  Income. — The  distinction  be- 
tween a  funded  and  an  unfunded  income,  or  between  an 
unearned  and  earned  income,  was  one  of  the  first  to  be 
made.  In  the  case  of  a  funded  income  the  income  is 
separated  from  any  personal  efforts  of  the  recipient,  while 
in  the  case  of  an  unfunded  income  it  is  dependent  upon 
the  exertions  of  the  individual.  It  is  the  difference  be- 
tween $3,000  in  interest  or  dividends  or  in  rents  from 
lands,  and  $3,000  paid  as  a  salary  for  personal  services. 


282  OUTLINES  OF  PUBLIC  FINANCE 

It  is  evident  that  it  is  a  greater  burden  to  give  up  a  part 
of  the  latter  $3,000  than  it  would  be  to  give  the  same 
proportion  of  the  first  $3,000.  In  the  one  case  savings 
need  not  be  considered,  because  the  income  is  certain, 
whether  the  recipient  works  or  not;  in  the  other  provision 
must  be  made  for  the  future,  when  the  income  will  cease 
because  of  the  incapacity  of  the  worker.  While  the  jus- 
tice of  such  a  differentiation  is  at  once  apparent,  it  is 
evident  that  such  distinctions  cannot  always  be  made 
with  absolute  precision.  Incomes  which  appear  to  be 
derived  exclusively  from  property  may,  upon  investiga- 
tion, be  found  to  depend  to  a  greater  or  less  extent  upon 
personal  activities.  A  part  of  the  rent  which  a  landlord 
receives  from  a  farm  may  arise  because  of  his  management 
of  the  methods  of  production,  the  choice  of  fertilizers, 
or  the  selection  of  seed.  Dividends  from  stocks  may  exist 
because  the  recipient  has  exercised  the  utmost  discretion 
in  their  purchase.  Many  incomes  from  capital  invest- 
ments, moreover,  depend  to  a  greater  or  less  extent  upon 
the  efficiency  of  the  management  of  the  owner.  It  is  quite 
evident,  then,  that  many  incomes  are  combinations  of 
funded  and  unfunded  parts,  the  separation  of  which  would 
involve  insurmountable  difficulties. 

Considerations  of  Justice.— Incomes  of  the  same  nature 
may  vary  in  their  ability  to  meet  fiscal  burdens.  Some 
may  have  a  large  number  of  necessary  and  fixed  charges 
against  them,  while  others  may  have  practically  none. 
The  amount  of  fixed  charges,  of  course,  makes  a  great 
difference  in  the  amount  which  may  be  disposed  of  in 
any  manner  which  may  be  decided  upon.  One  man,  with 
no  dependents,  may  have  an  income  of  $5,000,  against 
which  there  is  no  fixed  charge,  and  he  can  use  it  for  his 
enjoyment  as  he  chooses.  Another  man  with  the  same 
income,  with  a  home  to  support,  children  to  feed,  clothe, 
and  educate,  and  feeling  the  necessity  of  establishing  a  fund 
of  savings  to  meet  possible  emergencies,  may  have  very 
little  left  after  these  necessary  charges  are  provided  for. 


INCOME  TAXES  283 

Should  the  privilege  be  granted  of  deducting  all  neces- 
sary charges  which  arise  against  net  incomes  before  taxes 
could  be  levied,  the  plan  would  doubtless  be  abused  to 
such  an  extent  that  there  would  rarely  be  a  net  income 
left  against  which  to  impose  taxes.  The  principle  of  de- 
ductions, however,  is  generally  recognized  by  the  fiscal 
authorities  of  most  countries  which  use  the  income  tax. 
A  fixed  amount  is  usually  exempt  from  taxes,  and  stipu- 
lated deductions  are  allowed  for  each  dependent.  The 
attempts  of  various  countries  to  use  this  principle  will 
be  noted  in  the  discussion  of  their  method  of  taxing 
incomes. 

It  is  true  in  a  number  of  cases,  furthermore,  that  an 
individual  receives  an  income  from  his  property  without 
its  having  taken  the  form  of  money.  A  farmer  raises  his 
own  fruits  and  vegetables,  dresses  and  cures  his  own 
meat,  and  frequently  exchanges  wheat  which  he  has 
grown  for  flour  at  a  near-by  mill.  He  has  received  just  as 
much  enjoyment  from  these  goods  as  the  man  who  has 
received  a  money  return,  and  has  used  it  to  secure  the 
same  utilities.  A  man  who  lives  in  his  own  house  is  get- 
ting a  return  from  it  just  as  much  as  the  man  who  rents 
his  house  for  a  money  income. 

The  impossibility  of  an  accurate  measurement  of  these 
incomes,  which  do  not  resolve  themselves  into  a  monetary 
form,  is  obvious.  The  principles  of  justice  require  that 
some  account  should  be  taken  of  such  incomes  in  formu- 
lating a  scheme  of  income  taxes.  The  difficulty  is  at  once 
encountered,  however,  of  attempting  to  place  a  tangible 
value  upon  an  intangible  income. 

150.  Variations  Occur  in  Methods  of  Levying  Income 
Taxes. — Many  authorities  have  recognized  the  theoretical 
justice  of  the  income  tax,  yet  have  been  skeptical  of  its 
use  because  of  practical  difficulties  which  arise.  John 
Stuart  Mill  considered  it,  in  principle,  the  most  just  of  all 
forms  of  taxation,  yet  in  effect  it  was  more  unjust  than 
many  which  appeared  to  be  more  objectionable.  He  con- 


284  OUTLINES  OF  PUBLIC  FINANCE 

sidered  that  one  of  the  greatest  objections  was  that  it  fell 
most  heavily  upon  the  conscientious,  and  should  be  used 
only  in  great  emergencies. 

Exemptions. — Many  attempts  have  been  made  to 
eliminate  the  practical  difficulties  through  the  method  of 
levying  the  tax.  The  general  use  of  an  exemption  is  for 
securing  a  more  nearly  equal  sacrifice.  The  size  of  the 
exemption  varies  greatly  in  different  countries,  with  no 
particular  reason  for  the  amount  which  has  been  chosen. 
Objection  has  been  made  to  the  granting  of  any  exemption 
on  the  ground  that  every  citizen  possesses  some  ability  to 
pay  to  the  state.  This  objection  might  apply  to  large 
exemptions,  but  loses  its  force  when  the  exemption  is  not 
more  than  the  minimum  of  subsistence.  To  allow  at  least 
the  minimum  of  subsistence  to  be  free  from  tax  burdens, 
on  the  other  hand,  seems  more  logical.  To  encroach  upon 
this  will  mean  either  a  retrenchment  of  the  individual's 
expenditure,  to  his  detriment,  or  that  the  state  must  fur- 
nish aid  in  some  form  of  charity.  Neither  of  these  con- 
ditions is  a  desirable  result  from  a  fiscal  system.  When 
the  cost  of  assessment  and  collection  is  considered,  more- 
over, the  amount  received  from  small  incomes  is  an  ex- 
pensive form  of  revenue. 

Graduation. — Some  form  of  graduation  is  generally  used 
in  levying  income  taxes,  yet  in  this  also  there  is  no  uni- 
formity in  the  various  countries.  The  arguments  for 
progressive  rates  for  income  taxes  are  the  same  as  those 
advanced  for  progressive  taxes  under  the  discussion  of 
that  subject.1  The  application  of  progressive  rates  to 
the  taxation  of  incomes  conforms  to  the  faculty  basis  for 
measuring  taxes.  While  the  intangible  utility  of  incomes 
cannot  be  measured  with  any  degree  of  accuracy,  yet 
there  is  no  doubt  that  the  law  of  diminishing  utility  ap- 
plies to  the  acquisition  of  income.  As  successive  units 
are  added,  the  importance  of  each  unit  becomes  less 
than  the  preceding  one.  In  order  to  impose  the  same 

^ee.  110. 


INCOME  TAXES  285 

degree  of  burden  upon  incomes  of  various  amounts, 
more  than  a  proportionate  sum  must  be  taken  as  the  size 
increases. 

To  formulate  a  scale  of  progression  which  would  exactly 
secure  equality  of  sacrifice  for  all  individuals  would,  of 
course,  be  impossible.  Human  natures  and  desires  are 
too  diverse  for  this,  yet  greater  justice  would  be  secured 
by  an  attempt  at  the  ideal  than  if  strictly  proportionate 
rates  were  used.  In  most  cases,  at  least,  proportionate 
taxes  place  a  lighter  burden  upon  the  richer  classes  than 
upon  the  poorer,  and  are  less  felt  by  those  who  have  a 
wide  margin  above  the  minimum  of  subsistence  than  by 
those  who  have  only  a  small  surplus.  One  of  the  greatest 
justifications,  then,  for  progressive  rates  in  the  use  of 
income  taxes  is  to  equalize  the  burden  upon  different 
classes  ©f  incomes. 

The  advocate  of  proportional  taxation,  moreover,  should 
have  no  objection  to  progressive  income  tax  rates,  but 
rather  should  encourage  them.  Many  taxes,  it  has  been 
indicated,  fall  more  heavily  upon  the  poorer  classes  than 
upon  the  richer.  This  is  true  of  many  of  the  indirect 
taxes  upon  commodities  of  consumption,  and  also  of  the 
general  property  tax.  To  tax  the  larger  incomes  at  a 
higher  rate  than  the  smaller  simply  tends  to  counter- 
balance the  regressivity  of  other  taxes  and  to  secure  for 
the  system  as  a  whole  a  proportionate  burden. 

In  order  to  avoid  the  objection  of  ultimate  confiscation 
through  the  use  of  progressive  rates,  some  form  of  degres- 
sion is  used.  There  is  no  uniformity  of  method,  however, 
in  the  various  countries.  In  England  a  progressive  rate 
is  used  up  to  a  certain  amount,  after  which  the  rate  is 
proportionate.  In  the  Prussian  system  the  amount  taken 
from  each  grade  of  income  is  a  lump  sum  rather  than  a 
percentage.  The  amount  increases  with  each  grade,  but 
the  tax  becomes  regressive  within  the  grade.  Sometimes, 
as  in  the  United  States,  a  normal  proportionate  tax  is 
levied,  while  a  progressive  surtax  is  added.  The  degres- 


286  OUTLINES  OF  PUBLIC  FINANCE 

sivity  of  the  tax  is  also  affected  by  the  amount  of  exemp- 
tion which  is  allowed  by  the  different  countries. 

151.  Fiscal  Authorities  Meet  Difficulties  in  Ascertain- 
ing and  Classifying  Incomes. — Incomes  have  much  to 
recommend  them  as  sources  of  taxation.  If  any  single 
tax  were  practicable,  one  upon  incomes  would  doubtless 
most  nearly  meet  the  requirements  of  justice.  Incomes 
represent  a  flow  of  wealth,  a  part  of  which  can  be  given  up 
in  taxes  more  easily  than  can  a  part  of  property  against 
which  taxes  may  be  levied.  In  cases  of  property  taxes 
it  is  assumed  that  the  tax  is  to  be  paid  from  income  from 
the  property,  and  that  no  impairment  of  capital  will  be 
necessary.  The  source  of  the  tax  upon  property  is  sought 
in  a  separate  field  from  that  which  measures  ability,  while 
the  income  tax  is  taken  directly  from  that  which  is  used 
as  the  basis  for  measuring  the  ability.  That  the  latter 
will  more  nearly  conform  to  the  requirements  of  justice  in 
every  case  is  reasonably  sure. 

Many  individuals  with  large  incomes,  and  consequently 
able  to  meet  tax  burdens,  may  have  comparatively  little 
property.  Large  property  holdings,  on  the  other  hand, 
do  not  always  indicate  that  burdens  can  be  shouldered 
with  ease  because  of  the  unproductive  state  in  which  the 
property  may  be  found. 

The  difficulties  which  have  been  encountered,  however, 
in  finding  incomes,  and  in  securing  a  proper  classification 
according  to  taxpaying  ability,  have  restricted  the  use  of 
income  taxes.  It  may  be  said,  with  some  degree  of  accu- 
racy, that  three  different  methods  have  been  used  in  at- 
tempting to  secure  the  amount  of  income  which  shall  be 
subject  to  taxation. 

Estimates  of  Officials. — One  plan  for  assessing  incomes 
has  been  to  give  fiscal  authorities  the  power  of  estimating 
the  amount  of  incomes  that  shall  be  subject  to  taxes.  The 
difficulties  presented  are  at  once  apparent.  Chances  for 
variations  occur  according  to  the  abilities  or  inclinations 
of  the  various  officials,  Some  may  be  diligent  and  others 


INCOME  TAXES  287 

negligent;  some  may  be  exacting,  and  others  may  be 
content  with  much  less  than  a  full  assessment.  The  op- 
portunity for  favoritism  immediately  presents  itself,  along 
with  the  unpleasant  inquiries  into  the  business  affairs  of 
individuals.  In  fact,  many  of  the  undesirable  features 
which  accompany  the  valuation  of  property  by  local  asses- 
sors are  found  in  this  method  of  ascertaining  incomes. 

Personal  Declaration. — A  second  method,  which  has  been 
extensively  used  in  ascertaining  incomes,  is  to  have  the 
recipient  of  the  income  make  a  personal  declaration  of 
the  amount.  The  advantage  of  the  plan  of  self -assess- 
ment lies  in  the  minimizing  of  the  duties  of  fiscal  authori- 
ties and  the  absence  of  any  inquisitorial  processes.  The 
ease  of  evasion,  however,  constitutes  a  serious  difficulty 
with  the  use  of  this  method.  Inequalities  arise  when  the 
honest  recipients  of  incomes  make  full  returns,  while  the 
less  scrupulous  either  make  no  returns  or  falsify  those 
which  are  made.  Where  a  complex  system  exists,  it  is 
difficult,  at  times,  for  the  uninitiated  to  make  proper 
returns.  To  secure  a  semblance  of  uniformity,  then,  close 
official  supervision  becomes  necessary,  which  involves 
many  of  the  difficulties  which  have  been  indicated  in  the 
preceding  paragraph. 

Stoppage  at  Source. — In  order  to  overcome  the  problems 
indicated  above,  some  attempts  have  been  made  to  reach 
incomes  before  they  have  been  placed  in  the  hands  of  the 
recipient.  This  is  done  either  through  assessment  at 
source  or  collection  at  source.  In  the  first  case  the 
amount  of  the  income  is  ascertained  before  it  reaches  the 
recipient,  but  the  tax  must  be  paid  by  him;  in  the  latter 
plan  the  tax  is  deducted  before  the  payment  of  the  income 
is  made. 

Obviously  the  principle  of  assessing  or  collecting  at 
source  cannot  be  applied  to  all  incomes.  It  is  compara- 
tively easy  to  apply  in  the  case  of  government  salaries,  of 
interest  and  dividend  payments,  and  of  other  incomes  of 
this  nature,  but  cannot  be  used  satisfactorily  where  ari 


288  OUTLINES  OF  PUBLIC  FINANCE 

income  consists  of  returns  from  the  sale  of  merchandise, 
or  farm  products,  or  such  items  as  physician's  or  attor- 
ney's fees.  Where  the  source  basis  is  used,  then,  it  must 
be  supplemented  by  some  other  plan  to  reach  those  in- 
comes which  cannot  come  under  its  application. 

A  serious  objection  to  taxing  incomes  at  their  source 
arises  in  the  difficulty  of  applying  progressive  rates.  The 
income  of  a  particular  individual,  for  example,  might  be 
composed  of  items  from  a  number  of  sources.  The  rate 
which  would  apply  to  each  of  these  items  when  a  pro- 
gressive scale  is  in  force  would  likely  be  less  than  would 
apply  if  the  entire  income  were  taken  as  the  base. 

If  the  tax,  on  the  other  hand,  be  levied  upon  the  total 
of  a  dividend  or  interest  payment,  the  rate  would  be 
higher  than  what  would  apply  to  the  amount  which 
reaches  the  individual  recipients.  With  the  use  of  collec- 
tion at  source,  then,  some  readjustments  must  be  made 
with  the  individuals  in  order  that  the  progressive  rates 
may  have  uniformity  of  application.  Serious  administra- 
tive problems  often  arise  in  attempting  to  make  these 
adjustments.  The  burden  imposed  upon  the  agency  that 
withholds  the  tax,  moreover,  may  not  be  inconsiderable. 
This  was  one  of  the  difficulties  that  was  encountered  in 
the  attempt  of  the  United  States  to  use  this  device. 

Information  at  Source. — Some  attempts  have  been  made 
to  accomplish  the  same  ends  as  collection  at  source,  and 
yet  avoid  the  difficulties,  by  substituting  what  is  known  as 
information  at  source.  Under  this  plan  the  one  paying 
the  income  does  not  withhold  the  tax,  but  informs  the 
fiscal  officials  of  how  much  income  has  been  paid.  The 
income  tax  of  the  United  States  can  be  used  to  illustrate 
these  principles.  Collection  at  source  was  provided  to 
some  extent  by  the  first  income  tax  law.  By  the  law  of  1916 
anyone  who  paid  to  another  an  amount  which  was  sub- 
ject to  the  normal  tax  was  required  to  deduct  the  tax 
and  turn  it  over  to  the  government.  This  was  soon  given 
up,  and  in  the  law  of  1918  a  plan  of  information  at  source 


INCOME  TAXES  289 

was  substituted.  Anyone  who  makes  a  payment  to  an- 
other of  an  amount  of  or  exceeding  $1,000  in  any  year  is 
required  to  make  a  statement  of  such  payment  to  the  fiscal 
authorities. 

Other  Considerations. — It  is  generally  recognized  that 
mere  size  of  the  income  is  not  the  only  factor  to  be  con- 
sidered in  calculating  ability  to  pay.  Many  schedules 
have  consequently  been  devised  in  some  countries,  with 
different  rates  for  each,  in  the  attempt  to  more  nearly 
approximate  justice.  Such  factors  as  the  nature  of  the 
industry  and  its  age  are  given  consideration.  These  varied 
attempts  to  secure  justice,  with  the  consequent  adminis- 
trative problems,  account  for  the  variations  which  occur 
in  the  income  tax  systems  of  different  countries.  A  brief 
consideration  of  the  plans  used  by  some  of  the  more  im- 
portant countries  will  illustrate  the  attempts  to  make 
income  taxes  satisfactory. 

152.  The  Income  Tax  Has  Been  Successfully  Used  in 
England. — The  income  tax  has  held  an  important  place  in 
the  fiscal  system  of  England  for  more  than  three  quarters 
of  a  century.  Even  before  it  became  a  permanent  feature 
it  was  used  more  or  less  systematically.  As  early  as  the 
fourteenth  century,  incomes  had  a  place  in  the  base  for 
the  levy  of  taxes  in  what  were  called  poll  taxes.  The  first 
real  income  taxes,  however,  were  introduced  by  William 
Pitt,  about  the  beginning  of  the  nineteenth  century. 
These  taxes  resembled  subsequent  measures  in  that  ex- 
emptions and  certain  allowances  were  granted,  and  in- 
comes were  classified  into  schedules  according  to  their 
nature.  These  taxes  soon  went  into  disuse,  and  during 
the  succeeding  years  many  tax  experiments  were  tried. 
Laws  were  repealed  and  new  ones  enacted  without,  how- 
ever, introducing  any  radical  changes.  For  a  quarter  of 
a  century  the  taxation  of  incomes  was  discarded,  and  it 
was  not  till  1842  that  this  form  of  revenue  was  revived. 

Sir  Robert  Peel,  who  was  confronted  with  the  task  of 
meeting  a  deficit  in  the  treasury  caused  by  tariff  reduc- 


290  OUTLINES  OF  PUBLIC  FINANCE 

tions,  was  responsible  for  reestablishing  taxes  on  incomes. 
The  enactment  was  made  for  but  three  years,  but  at  the 
expiration  of  this  time  the  law  was  again  placed  upon  the 
statute  books.  The  process  of  reenacting  the  law,  with 
occasionally  some  slight  modifications,  has  continued  to 
the  present  time.  The  act  of  1842  is,  therefore,  the  basis 
of  the  present  English  income  tax  system,  which  is  con- 
sidered by  many  to  be  one  of  the  most  successful  in 
operation. 

Modern  Schedules. — The  classification  of  incomes  into 
schedules  has  been  a  fundamental  part  of  all  the  English 
income  tax  laws.  The  present  law  provides  for  five  sched- 
ules. Schedule  A  comprises  the  income  from  land  and 
buildings,  in  which  is  included  the  rental  value  of  lands 
and  buildings  occupied  by  the  owner,  as  well  as  receipts 
by  a  landlord.  Schedule  B  is  designed  to  cover  the  income 
from  farm  land,  whether  received  by  tenant  or  owner. 
Incomes  from  lands  used  in  connection  with  industrial 
establishments  are  included  in  neither  of  these  schedules. 
Schedule  C  includes  "all  profits  arising  from  interest,  an- 
nuities, dividends,  and  shares  of  annuities  payable  to  any 
person,  body  politic,  or  corporate  company  or  society, 
whether  corporate  or  not  corporate,  out  of  any  public 
revenue." 

The  incomes  which  fall  under  Schedule  D  are  more 
than  those  of  all  the  other  schedules.  These  include, 
first,  all  incomes  which  accrue  to  any  person  residing  in 
the  United  Kingdom  from  any  kind  of  property,  whether 
located  in  the  United  Kingdom  or  not;  and  all  gains 
secured  by  any  person  residing  in  the  United  Kingdom 
from  any  profession,  trade,  employment,  or  vocation, 
whether  this  be  carried  on  in  the  United  Kingdom  or  else- 
where. Second,  under  this  schedule  is  placed  the  returns 
arising  to  any  person,  whether  a  subject  of  Great  Britain 
or  not,  whether  a  resident  of  the  United  Kingdom  or  not, 
from  any  profit  in  the  United  Kingdom,  or  any  profession, 
trade,  employment,  or  vocation  carried  on  within  the 


INCOME  TAXES  291 

United  Kingdom.  A  third  part  of  this  schedule  reaches 
forms  of  interest,  annuities,  and  profits  which  are  not 
covered  by  the  other  schedules.  Schedule  E  has  been 
relatively  unimportant  and  applies  to  salaries  of  public 
officials,  government  annuities,  and  pensions. 

Graduation. — Graduation  is  provided  for  by  exemptions, 
abatements,  and  supertaxes.  Incomes  of  less  than  £160 
are  not  taxed.  The  schedule  of  abatements  is  as  follows: 
incomes  of  more  than  £160  but  not  more  than  £400,  an 
abatement  of  £160;  incomes  of  more  than  £400  but  not 
exceeding  £500,  an  abatement  of  £150;  incomes  of  more 
than  £500  but  not  exceeding  £600,  an  abatement  of  £120; 
incomes  of  more  than  £600  but  not  exceeding  £700,  an 
abatement  of  £70.  No  abatement  is  allowed  for  incomes 
exceeding  £700,  but  the  rate,  which  is  fixed  each  year, 
applies  to  the  entire  income. 

The  actual  percentage  rates,  assuming  the  rate  to  be 
one  shilling  to  the  pound,  for  various  amounts,  would  be 
as  follows:  £161,  .0003  per  cent;  £400,  3  per  cent;  £401, 
3.1  per  cent;  £500,3.5  per  cent;  £601, 4.4  per  cent;  £700, 
4.5  per  cent.  All  amounts  above  this  pay  the  proportional 
rate  of  5  per  cent. 

Additional  abatements  are  allowed  for  life  insurance 
premiums,  charities,  and  other  benevolences,  while  land 
and  building  depreciation  is  also  granted.  One  eighth  of 
the  income  from  land  is  allowed  to  be  deducted,  and  the 
amount  for  building  depreciation  is  one  sixth.  Under 
certain  conditions  the  deduction  may  be  as  much  as  twice 
this  amount.  An  abatement  of  £10  for  each  child  under 
sixteen  years  of  age  is  allowed  to  individuals  whose  income 
does  not  exceed  £500. 

Declarations. — The  necessity  of  making  a  declaration  of 
income  in  order  to  secure  the  benefit  of  exemptions  and 
abatements  is  responsible  for  the  fact  that  a  majority  of 
income  tax  payers  declare  the  total  amount  of  their  in- 
comes, even  though  the  taxes  are  collected  to  a  large  ex- 
tent at  the  source.  The  situation  usually  resolve?  itself 


292  OUTLINES  OF  PUBLIC  FINANCE 

into  a  refund  of  taxes  which  have  been  collected  in  excess 
of  the  amount  which  would  have  been  taken  had  the  abate- 
ment been  deducted  beforehand.  The  abatement  claims 
usually  run  into  the  thousands,  and  it  becomes  necessary 
to  refund  thousands  of  pounds. 

Modifications  of  Above  Outline. — In  an  attempt  to  tax 
incomes  more  nearly  in  accordance  with  their  ability  to 
bear  burdens,  differentiations  have  been  made  and  super- 
taxes have  been  placed  upon  the  larger  incomes.  A  dis- 
tinction is  also  made  between  earned  and  unearned  in- 
comes. On  incomes  such  as  wages  and  salaries,  the  rate  is 
usually  reduced  something  like  25  per  cent,  while  it  is 
increased  for  incomes  from  investments.  The  supertax, 
for  example,  under  one  law  was  to  apply  whenever  the 
total  income  exceeded  £5,000,  and  was  to  be  levied  against 
the  amount  in  excess  of  £3,000.  Individuals  subject  to 
the  supertax  are  required,  under  severe  penalty,  to  make 
declaration  of  the  fact  to  the  fiscal  authorities. 

The  administration  of  the  system  is  somewhat  compli- 
cated, yet  apparently  satisfactory.  A  large  number  of 
officials  are  concerned  with  assessments  and  collections. 
These  appear  to  be  remarkably  free  from  political  in- 
fluences— a  fact  which  aids  materially  in  securing  satis- 
factory results.  As  already  indicated,  an  extensive  use 
is  made  of  collecting  the  tax  at  the  source,  which  lessens 
the  problem  of  securing  income  assessments,  but  which 
enhances  that  of  making  proper  allowance  for  the  abate- 
ments. 

This  broad  outline  of  the  English  income  tax  may  not 
conform  to  the  details  of  a  particular  year,  for  these 
change  somewhat  with  the  adoption  of  the  annual  budget. 
The  Great  War,  of  course,  necessitated  changes  to  meet 
the  emergency  which  will  be  noted  in  a  succeeding  chap- 
ter. The  above  outline,  therefore,  is  intended  to  give 
some  idea  of  the  English  plan  as  it  had  developed 
under  normal  conditions.  As  a  whole,  opposition  to 
the  income  tax  has  broken  down,  and  the  tax  now 


INCOME  TAXES  293 

functions  as  one  of  the  most  successful  features  of  the 
fiscal  system. 

Reasons  for  Success. — Some  of  the  reasons  for  the 
marked  success  of  the  British  income  tax  have  been 
summed  up  by  Professor  Seligman.1  He  points  out  that 
the  system  of  assessment  is  successful  because  the  asses- 
sors command  the  confidence  of  the  recipients  of  incomes. 
The  supervision  is  by  men  of  high  caliber,  who  are  render- 
ing service,  not  for  private  gain,  but  because  they  are 
animated  by  a  spirit  of  public  duty.  The  collection  at 
source,  furthermore,  has  eliminated  the  distasteful  and 
disquieting  inquisitorial  procedure  which  arises  from  the 
attempt  to  assess  incomes.  The  policy  of  keeping  the 
rate  low,  of  recognizing  different  classes  of  incomes,  and 
the  introduction  of  graduation  and  supertaxes,  have  had 
their  influence  in  making  the  tax  generally  popular.  The 
success  of  present  income  taxes  in  England  is  a  monument 
to  the  thought  and  care  which  the  fiscal  experts  exercised 
in  organizing  and  proposing  this  form  of  revenue. 

153.  Prussia  Has  Used  Income  Taxes  Successfully. — • 
The  Prussian  income  tax  had  its  beginnings  in  the  use  of 
poll  and  class  taxes  as  far  back  as  1811.  Gradual  changes 
in  subsequent  fiscal  laws  have  resulted  in  a  use  of  the 
income  tax  as  extensive  as  is  found  in  any  country.  Be- 
fore the  outbreak  of  the  Great  War  more  than  three 
fourths  of  the  entire  revenue  came  from  the  income  tax, 
and  the  success  may  be  attributed  partly  to  the  care 
which  has  been  exercised  in  formulating  the  laws,  and 
partly  to  the  respect  which  the  citizenship  has  had  for 
the  mandates  of  the  state.  The  war,  of  course,  brought 
some  modifications,  but  the  principle  of  the  income  tax 
of  pre-war  days  will  likely  be  continued. 

Tax  Rate. — The  tax  rate  is  kept  comparatively  low,  and 
an  attempt  is  made  at  progression,  although  it  is  not 
logically  followed  throughout  the  entire  schedule  of  levies. 
The  lowest  rate,  six  marks  from  incomes  between  900  and 

1  Seligman,  The  Income  Tax,  p.  214. 


294  OUTLINES  OF  PUBLIC  FINANCE 

1,500  marks,  is  a  little  over  one  half  of  1  per  cent,  while 
the  highest  rate,  placed  upon  incomes  over  100,000  marks, 
is  about  4  per  cent.  The  exaction  of  a  fixed  number  of 
marks  from  each  grade  of  income  makes  the  tax  regres- 
sive within  the  grade — that  is,  the  tax  is  heavier  for  in- 
comes just  over  the  lower  limit  than  for  incomes  just  under 
the  upper  limit. 

Exemptions  and  Abatements. — As  in  the  English  income 
tax,  exemptions  and  abatements  are  granted.  All  incomes 
of  less  than  900  marks  (about  $214)  are  not  taxed.  It  is 
considered  that  the  property  taxes  and  excise  taxes,  which 
are  used  to  supplant  the  income  tax,  place  a  sufficient 
burden  upon  the  poorer  class  of  citizens.  Whenever  the 
income  of  an  individual  is  less  than  3,000  marks,  a  re- 
duction of  50  marks  is  allowed  for  each  dependent.  The 
reduction  is  somewhat  different  when  the  income  is 
between  3,000  and  6,500  marks. 

If  the  income  does  not  exceed  9,500  marks,  any  circum- 
stances which  have  affected  unfavorably  the  source  of 
income  may  be  taken  into  consideration  by  the  assessing 
officials,  and  deductions  be  made  accordingly.  Deduc- 
tions from  income  may  be  made  for  public,  charitable, 
and  religious  contributions,  interest  payments,  municipal 
and  local  taxes,  and  payments  of  various  kinds  of  insur- 
ance premiums. 

The  Prussian  law  does  not  attempt  to  reach  as  many 
classes  of  incomes  as  does  the  English  system.  Incomes 
derived  from  undertakings  in  other  German  states  are  not 
taxed,  nor  is  the  pay  of  many  of  the  military  officers. 
Insurance  payments  and  sinking  funds  are  also  exempt. 
The  income  tax  as  described  is  supplemented  by  a  tax 
upon  wealth,  and  at  times,  when  the  treasury  is  in  need 
of  extra  funds,  by  a  supertax  upon  incomes.  The  com- 
bination of  wealth  and  income  taxes  is  designed  to  give  a 
system  which  will  impose  taxes  as  nearly  as  possible 
according  to  ability  to  pay. 

Collection  of  Tax. — No  attempt  is  made  to  collect  the 


INCOME  TAXES  295 

tax  at  the  source,  but  the  amount  of  income  to  be  taxed 
is  ascertained  by  a  system  of  declaration  and  assessment. 
Information  as  to  the  recipients  of  incomes,  and  the 
amounts,  is  secured  by  the  officials  from  various  sources. 
On  the  basis  of  this  information  the  local  officials  estimate 
the  amount  of  incomes  of  the  individuals  who  will  prob- 
ably be  subject  to  the  tax.  Every  person  whose  income 
is  more  than  3,000  marks  is  required  to  make  a  declaration 
on  special  forms  which  are  provided  by  the  officials. 

Corporations  and  other  companies  are  required  to  make 
a  declaration,  and  must  submit,  with  the  report  of  income, 
annual  reports,  balance  sheets,  and  other  data,  to  be  kept 
on  file  by  the  fiscal  authorities.  Failure  to  make  the 
declaration  by  a  specified  time  is  punished  by  the  imposi- 
tion of  a  fine  of  5  per  cent  of  the  tax,  and  if  the  failure 
extends  to  a  second  specified  time,  the  fine  is  25  per  cent 
of  the  tax.  There  is,  of  course,  some  evasion,  but  it  has 
not  been  extensive  enough  to  destroy  the  importance  and 
approximate  justice  of  the  system. 

154.  Many  Other  Foreign  Countries  Use  the  Income 
Tax. — One  would  not  be  justified  in  a  book  of  this  nature 
in  even  briefly  outlining  the  use  of  the  income  tax  as  it  is 
found  in  more  than  fifty  countries  outside  the  United 
States.  In  some  of  the  countries  it  forms  an  important 
part  of  the  revenue  system,  while  in  others  its  role  is 
comparatively  insignificant.  The  significant  feature  is 
that  the  tax  is  one  of  the  newest  systems  of  securing 
revenue,  and  that  its  place  in  the  different  countries 
where  it  is  being  used  is  becoming  more  extended  and 
secure.  A  brief  mention  of  some  of  the  countries  where 
the  tax  is  playing  an  important  part  will  reveal  the  fact 
that  it  is  found  in  new  as  well  as  in  firmly  established 
governments,  and  in  radical  as  well  as  conservative 
states. 

An  outline  has  been  given  of  the  Prussian  income  tax 
system  because  it  represents  one  of  the  best  organized 
forms  of  income  taxation,  yet  income  taxes  have  been  in 


296  OUTLINES  OF  PUBLIC  FINANCE 

use  in  the  minor  German  provinces  much  longer  than 
they  have  been  found  in  Prussia.  In  these,  as  in  most  of 
the  continental  taxes,  low  exemptions  and  minute  classi- 
fications are  found. 

The  English  colonies  have  followed  the  lead  of  the 
Mother  country,  and  have  made  extensive  use  of  the 
income  tax.  The  different  states  of  Australia  have  well- 
developed  and  important  income  taxes.  The  Federal 
government  of  Canada  has  not  made  such  an  extensive 
use  of  this  form  of  revenue  as  some  other  countries, 
although  income  taxes  hold  an  important  place  in  some 
of  the  provinces.  These  taxes  resemble  the  British  plan 
of  comparatively  high  exemptions,  with  no  definite  scale 
of  progression.  India  has  a  systematic  plan  which  some- 
what resembles  the  British. 

Italian  and  Austrian  fiscal  machinery  very  early  made 
a  place  for  income  taxes,  while  they  have  for  a  number  of 
years  played  an  important  part  in  the  revenue  systems  of 
Norway,  Switzerland,  Hungary,  Russia,  Japan,  and  the 
Philippines.  France  adopted  the  tax  in  1914,  but  the 
outbreak  of  the  war  interfered  with  putting  it  into  effect. 

Many  other  examples  might  be  given  of  the  use  of  in- 
come taxes,  but  enough  have  been  cited  to  warrant  the 
conclusion  that  their  use  is  very  general.  More  than  half 
of  the  people  of  the  world  are  now  living  under  the  domain 
of  income  taxes.  These  taxes  are  not  used  as  extensively 
by  Federal  governments  as  by  the  smaller  political  divi- 
sions, although  central  governments  have  shown  a  tend- 
ency to  favor  the  tax.  The  comparative  newness  of  the 
tax  is  another  general  characteristic — a  large  majority  of 
present  systems  having  been  introduced  since  the  begin- 
ning of  the  present  century.  After  this  survey  of  the  tax 
abroad  the  situation  in  the  United  States  will  be  of  in- 
terest to  American  students. 

155.  Federal  Income  Taxes  in  the  United  States  Have 
Had  No  Systematic  Development. — No  emergency  of 
sufficient  moment  arose  for  more  than  half  a  century  after 


INCOME  TAXES  297 

the  establishment  of  our  national  government  to  force 
fiscal  authorities  to  utilize  every  possible  source  of  rev- 
enue. No  attempt  was  made,  consequently,  by  Federal 
fiscal  authorities,  to  introduce  income  taxes  until  the  un- 
precedented demands  of  the  Civil  War  presented  them- 
selves. The  income  tax  legislation  of  the  years  of  this 
war,  and  those  following,  appears  to  have  been  on  the 
spur  of  the  moment,  and  shows  evidence  of  no  very 
mature  deliberations  of  those  who  were  responsible  for  it. 
Provisions  enacted  at  one  time  would  often  be  amended 
before  the  date  for  their  becoming  effective. 

Civil  War  Income  Tax. — The  first  bill  which  provided 
for  a  Federal  income  tax  was  passed  in  July,  1861.  It 
was  simple,  and  called  for  a  3  per  cent  tax  on  all  incomes 
in  excess  of  $800.  The  tax  was  not  to  go  into  effect  for 
a  year,  and  in  the  meantime  a  modification  had  been  made. 
The  exemption  was  reduced  to  $600  and  a  system  of  mild 
progression  added. 

Under  this  law  incomes  from  $600  to  $10,000,  less  the 
$600  exemption,  were  to  pay  the  rate  of  3  per  cent,  while 
incomes  in  excess  of  that  amount  were  to  pay  5  per  cent. 
This  act  was  in  effect  but  a  little  while  before  the  Revenue 
Act  of  1864  became  a  law.  This  provided  for  a  5  per  cent 
tax  upon  incomes  between  $600  and  $5,000;  7K  per  cent 
on  the  amount  of  income  between  $5,000  and  $10,000, 
and  10  per  cent  on  all  incomes  over  $10,000.  Before  this 
law  became  active,  however,  a  modification  was  made  by 
which  all  amounts  over  $5,000  were  to  pay  10  per  cent. 

By  1867  the  pressure  for  revenue  was  somewhat  re- 
duced, and  the  law  passed  then,  to  remain  in  force  for 
three  years,  raised  the-  exemption  to  $1,000,  and  reduced 
the  rate  to  5  per  cent.  At  the  expiration  of  this  law  in 
1870,  it  was  only  with  the  greatest  difficulty  that  a  re- 
enactment  was  secured.  This  was  for  a  period  of  two 
years,  after  which  the  income  tax  fell  into  disuse. 

Constitutionality. — The  use  of  the  Civil  War  income  tax 
was,  in  a  measure,  successful.  As  might  be  expected,  it 


298  OUTLINES  OF  PUBLIC  FINANCE 

was  attacked  upon  the  grounds  of  constitutionality,  the 
contention  being  that  it  was  a  direct  tax,  and  therefore 
repugnant  to  the  constitutional  provision  in  regard  to  the 
levy  of  direct  taxes.  The  Supreme  Court  held,  however, 
that  the  income  tax  was  not  a  direct  tax  within  the  mean- 
ing of  the  Constitution,  and  was  therefore  constitutional.1 

Administration. — At  first  the  unorganized  administra- 
tive machinery  was  a  handicap,  but  as  this  became  per- 
fected, and  while  the  motive  of  patriotism  was  active,  the 
fiscal  returns  were  large.  The  largest  amount  collected 
in  any  one  year  was  in  1866,  when  $72,982,000  came  into 
the  treasury.  In  the  following  years  evasion  became  more 
common,  and  the  amount  collected  in  1872  had  fallen  to 
$14,436,000.  The  total  amount  collected  from  the  income 
tax  was  more  than  $275,000,000. 

Most  dependence  for  the  determination  of  incomes  was 
placed  in  declarations  of  recipients,  although  some  use 
was  made  of  the  source,  and  the  assessors  were  given  the 
power  to  estimate  incomes  where  satisfactory  declarations 
could  not  be  obtained.  Penalties  were  provided  for  fail- 
ure to  make  returns,  and  for  fraudulent  returns,  but  in 
the  latter  years  of  the  tax  these  seem  to  have  instilled 
little  fear  into  the  recipients  of  incomes.  It  became  a  tax 
upon  the  honest  individual,  and  consequently  unjust.  A 
systematic  as  well  as  successful  income  tax  was  used  by 
the  Confederate  government  as  one  of  its  sources  of 
revenue. 

156.  Federal  Income  Taxes  Were  Attempted  in  1894.— 
After  the  abandonment  of  the  income  tax  in  1872  revenues 
were  so  large  from  other  sources  that  practically  no  con- 
sideration was  given  to  this  form  of  taxation.  It  was  not 
until  1894  that  an  occasion  seemed  to  demand  more 
revenue  than  would  come  from  existing  sources.  This 
resulted  from  a  reduction  of  tariff  duties  and  an  enlarge- 
ment of  the  free  list  under  the  administration  of  Presi- 
dent Cleveland.  An  income  tax  provision  was  made  a 

1  Springer  t;s.  the  United  States,  102  TJ.  S.  586. 


INCOME  TAXES  299 

part  of  the  tariff  law  of  1894,  and  was  expected  to  provide 
the  deficiency  in  the  revenue  which  the  reduced  tariff 
rates  would  occasion.  The  bill  provided  for  a  flat  rate  of 
2  per  cent  on  all  incomes  above  $4,000. 

Much  opposition  to  the  bill  developed  in  Congress  on 
the  ground  that  it  was  undemocratic,  inquisitorial,  and  the 
still  more  serious  objection  that  it  was  a  bid  for  the  sup- 
port of  the  poorer  classes  in  a  discrimination  against  the 
more  well-to-do.  The  high  exemption  was  strongly 
championed  by  the  Populist  party,  while  nearly  the  whole 
of  the  support  of  the  measure  came  from  the  Western 
and  Southern  representatives. 

Law  Declared  Unconstitutional. — The  question  of  the 
constitutionality  of  the  law  soon  came  before  the  Supreme 
Court.1  This  was  considered  under  four  separate  heads: 

(1)  Was  a  tax  on  the  income  of  real  estate  a  direct  tax 
within  the  meaning  of  the  Constitution,  necessitating, 
thereby,   a  levy  apportioned  according  to  population? 

(2)  Was  a  tax  on  the  income  from  personal  property  a 
direct  tax?    (3)  Did  the  law  violate  the  principle  of  uni- 
formity?   (4)  Was  a  tax  levied  upon  incomes  from  state 
and  municipal  bonds  constitutional? 

The  decision  on  the  Civil  War  income  tax  was  reversed 
when  the  court  decided  that  a  tax  on  the  incomes  from 
lands  was  direct,  and  therefore  must  be  apportioned  ac- 
cording to  population.  The  court  in  its  first  decision  was 
divided  on  the  constitutionality  of  the  other  points,  but 
at  the  rehearing  decided  against  the  law  in  every  respect. 
Many  considered  that  this  decision  settled  once  and  for 
all  the  agitation  for  an  income  tax,  while  others  began  to 
seek  a  new  method  for  securing  its  establishment. 

157.  The  Present  Federal  Income  Tax  Was  Made  Pos- 
sible Through  a  Constitutional  Amendment. — After  the 
adverse  decision  of  1895,  sentiment  in  favor  of  the  income 
tax  as  a  source  of  Federal  revenue  seemed  to  gain  ground. 

1  Pollock  vs.  Fanners'  Loan  and  Trust  Co.,  157  U.  S.  429.  This  opinion 
was  rendered  in  April,  1895;  the  second  was  rendered  in  May,  158  U.  S.  601. 


300  OUTLINES  OF  PUBLIC  FINANCE 

Many  statesmen,  among  them  President  Roosevelt,  de- 
clared in  favor  of  income  tax  legislation,  and  believed 
that  a  law  could  be  so  formulated  as  to  be  sanctioned  by 
the  court.  Laws  had  been  upheld  already  which  imposed 
taxes  on  the  income  of  some  corporations,  and  upon 
inheritances. 

In  its  platform  of  1908  the  Democratic  party  declared 
in  favor  of  a  constitutional  amendment,  permitting  the 
Federal  government  to  levy  an  income  tax.  President 
Taft  expressed  the  belief  that  an  amendment  was  not 
necessary,  yet  did  not  encourage  the  adoption  of  the  in- 
come tax  during  his  term  of  office.  The  Republican 
leaders  seemed  no  more  enthusiastic,  and  in  order  to 
calm  the  agitation  for  income  taxes  arrangement  was 
made  to  submit  an  amendment  to  the  states.  As  a  result 
the  following  Sixteenth  Amendment  was  ratified  by  the 
requisite  three  fourths  of  the  states  in  1913:  "  Congress 
shall  have  power  to  lay  and  collect  taxes  on  income  from 
whatever  source  derived,  without  apportionment  among 
the  several  states,  and  without  regard  to  any  census  or 
enumeration." 

Tax  Adopted  in  1913. — With  this  amendment  in  force, 
on  October  3,  1913,  the  President  signed  "An  Act  to  re- 
duce tariff  duties  and  to  provide  revenue  for  the  govern- 
ment and  for  other  purposes/'  As  in  1894,  the  income 
tax  law  was  a  part  of  a  tariff  bill.  This  comprises  the 
second  part  of  what  is  generally  known  as  the  Underwood- 
Simmons  Tariff  Act.  The  law  is  not  a  detailed  piece  of 
legislation,  but  rather  a  framework  which  was  to  be  filled 
in  by  rulings  of  the  Treasury  Department.  No  attempt 
will  be  made  to  go  into  the  details  in  this  volume,  as  many 
detailed  and  technical  treatises  are  available. 

Court  Decision. — In  spite  of  the  amendment,  the  con- 
stitutionality of  the  law  was  contested  in  the  courts.  It 
was  contended  that  the  progressive  feature,  which  classi- 
fied according  to  wealth,  was  unwarranted,  unjust,  and 
unreasonable;  that  the  collection  at  source  involved  the 


INCOME  TAXES  301 

taking  of  property  without  due  process,  as  well  as  the 
taking  of  private  property  for  public  use  without  just 
compensation;  and  that  the  retroactive  feature  of  the 
law — it  taxed  incomes  received  since  the  preceding  March 
— was  unconstitutional. 

Chief  Justice  White  rendered  the  decision  of  the  court 
and  upheld  the  law  in  every  respect.1  He  gave  a  lengthy 
discussion  of  the  nature  of  direct  and  indirect  taxes  under 
the  meaning  of  the  Constitution,  and  of  the  place  of  the 
income  tax  in  this  classification.  In  regard  to  the  points 
in  question  the  court  held  that  the  retroactive  feature  did 
not  vitiate  the  law,  neither  did  it  violate  the  due  process 
of  law  provision  of  the  Fifth  Amendment.  Tax  uniformity 
required  by  the  Constitution  was  geographical,  and  equal 
protection  of  the  law  was  not  denied  by  a  classification  of 
things  and  persons. 

The  provisions  for  collecting  the  income  tax  at  the 
source  did  not  deny  due  process  of  law  by  reason  of  duties 
imposed  upon  corporations  without  compensation  in  con- 
nection with  the  payment  of  the  tax.  Where  differences 
existed  between  citizens,  Congress  did  not  transcend  the 
limit  of  its  taxing  power  by  taxing  them  differently. 
Other  cases  involving  the  law  have  come  before  the  court, 
and  the  decisions  have  generally  served  to  strengthen  the 
income  tax. 

Incomes  Taxed;  Rates. — The  law  is  inclusive  in  the  per- 
sons who  are  taxable.  Every  citizen  of  the  United  States, 
whether  residing  at  home  or  abroad,  is  subject  to  the  tax. 
All  persons  residing  in  the  United  States,  including  minors, 
are  subject  to  its  provisions,  as  also  are  all  persons  residing 
without  the  United  States  who  receive  an  income  from 
property  owned,  or  business  or  profession  carried  on, 
within  the  United  States. 

The  tax  is  divided  into  two  parts — the  normal  tax  and 
the  additional  tax.  The  normal  tax  is  a  proportional  tax 
of  1  per  cent  upon  the  entire  taxable  income,  while  the 

1  Brushaber  vs.  Union  Pacific  Railroad,  240  U.  S.  1. 


302  OUTLINES  OF  PUBLIC  FINANCE 

additional  tax  introduces  the  progressive  feature.     The 
additional  tax  schedule  is  as  follows: 

1%  on  net  income  over  $  20,000  but  not  exceeding  $  50,000 
2%   "     "         •'          "         50,000    "      "  "  75,000 

3%   "     "         "          "         75,000    "      "  "  100,000 

4%    "     "         "          "       100,000    "      "  "  250,000 

5%   "  '  "         "          "       250,000    "      "  "  500,000 

6%   "     "  "       500,000 

The  law  defined  as  taxable  all  profits  and  income  de- 
rived from  salaries  or  compensation  for  personal  services, 
or  from  professions,  business,  or  trade.  Incomes  from  in- 
terest, rents,  dividends,  securities,  or  the  transaction  of 
any  lawful  business  carried  on  for  gain  or  profit,  and  in- 
comes derived  from  any  source  are  included. 

Deductions  and  Exemptions. — From  gross  income  cer- 
tain deductions  are  allowed.  Among  these  are  necessary 
business  expenses,  but  not  family,  living,  or  personal 
expenses;  interest  on  indebtedness  payable  within  the 
year,  and  all  taxes  except  those  levied  for  local  benefits. 
Actual  losses  sustained  not  covered  by  insurance,  a  rea- 
sonable depreciation,  and  worthless  debts  which  have 
been  charged  off  are  also  allowed.  Deduction  is  also  per- 
mitted of  income  which  has  been  taxed  at  the  source,  and 
of  the  dividends  of  companies  whose  net  earnings  are 
taxable. 

The  exemptions  allowed  by  the  law  are  liberal.  An 
exemption  of  $3,000  is  given  to  a  single  person,  and 
$4,000  is  allowed  to  a  man  and  wife  living  together.  All 
property  acquired  through  gifts,  bequests,  or  descents, 
and  all  interest  on  obligations  of  the  United  States  or  its 
possessions,  are  exempt  from  the  tax,  as  is  also  the  interest 
on  the  obligations  of  the  minor  political  divisions.  The 
compensations  paid  by  all  political  units,  except  the 
United  States  government  itself,  are  also  exempt  from  the 
tax.  Receipts  from  life  insurance  policies,  moreover,  are 
not  taxed. 

Method  of  Collection. — Use  is  made  both  of  collection  at 


INCOME  TAXES 


303 


the  source,  and  of  declaration  of  income.  Any  person  or 
company  which  pays  to  another  person  or  company  an 
amount  in  excess  of  the  legal  exemption,  is  required  to 
deduct  the  normal  tax  and  pay  it  to  the  proper  official. 
When  an  income  is  subject  to  the  normal  tax  alone,  and 
the  entire  amount  is  received  from  a  person  or  company 
which  has  paid  the  tax  at  the  source,  no  return  of  such 
income  is  required.  Returns  of  all  other  taxable  incomes 
are  required  to  be  made  by  the  recipient  of  the  income. 
Penalties  are  provided  for  failure  to  make  returns,  for 
making  fraudulent  returns,  and  for  failure  to  pay  the  tax. 

158.  The  Income  Tax  Was  Modified  by  the  Revenue 
Act  of  1916. — It  was  too  much  to  hope  that  the  new  tax 
law  would  meet  with  unmitigated  success.  A  heavy  bur- 
den was  placed  upon  the  internal  revenue  department  of 
the  treasury  in  interpreting  ambiguous  phraseology,  and 
in  rendering  opinions  and  decisions  of  various  kinds. 
The  degree  of  success  which  the  law  attained  really  de- 
pended upon  these  officials.  While  interpretation  was  all 
that  was  necessary  in  some  instances,  some  conditions 
developed  which  demanded  a  change  in  the  law.  The 
first  of  the  nine  titles  in  the  Revenue  Act  of  1916  consists 
of  the  remodeled  income  tax  law. 

Rates  Under  Act  of  1916. — The  perceptible  changes  in 
the  1916  law  do  not  indicate  the  amount  of  consideration 
which  was  given  to  this  phase  of  the  revenue.  While 
many  changes  were  made  in  phraseology,  the  essential 
features  remain  very  much  the  same.  The  most  conspicu- 
ous change  is  in  the  normal  rate  and  in  the  additional 
rate.  The  normal  rate  is  doubled,  while  the  schedule  of 
additional  rates  under  the  new  law  is  as  follows: 


20 


1%  on  net  income  over  $ 

2% 
3% 
4% 

5% 
6% 

7% 


20,000  not  exceeding 

40,000 

60,000 

80,000 
100,000 
150,000 
200,000 


40,000 

60,000 

80,000 

100,000 

150,000 

200,000 

350,000 


304  OUTLINES  OF  PUBLIC  FINANCE 

8%  on  net  income  over  $    250,000  not  exceeding  $  300,000 


9%  ' 

10%  " 

11%  « 

12%  " 


300,000  500,000 

500,000  "  "  1,000,000 

1,000,000  "  "  1,500,000 

1,500,000  "  "  2,000,000 


13%    '  2,000,000 

Attempted  Modifications. — In  the  1916  revision  much 
pressure  was  brought  to  have  the  exemption  lowered  to 
$1,000.  This  was  unsuccessful,  however,  because  of  the 
administrative  difficulties  already  involved  and  because 
of  the  great  increase  in  these  burdens  which  would  ensue 
from  the  reduction.  Pressure  had  been  brought,  too,  to 
abolish  the  collection  at  source  feature,  because  of  the 
burden  placed  upon  the  companies  who  were  compelled 
to  pay  the  tax.  Some  desired  that  this  be  changed  to 
information  at  the  source,  but  this  was  not  done.  Other 
changes  which  many  desired,  but  which  were  not  made, 
were  the  elimination  of  much  unjust  double  taxation  be- 
cause of  the  treatment  of  foreigners,  and  the  recognition 
of  some  differentiation  in  incomes. 

Important  additions  were  made  to  this  law  by  the  War 
Revenue  Acts  of  1917  and  1919.  These  will  be  outlined  in 
the  chapter  on  Emergency  Financiering.1  The  law  of  1916 
represents  our  development  of  income  taxes  under  nor- 
mal conditions.  Although  a  recent  addition  to  the  Fed- 
eral revenue  system,  income  taxes  have  more  than  proved 
their  worth.  In  the  use  of  a  source  of  revenue  as  new  as 
the  income  tax,  a  large  amount  of  evasion  has  been 
practiced,  but  this  difficulty  will  decrease  as  the  system 
becomes  better  understood  and  the  administrative  ma- 
chinery becomes  more  perfect.  The  amount  of  revenue 
derived  from  this  source  has  been  considerable,  and 
income  taxes  are  destined  to  continue  to  occupy  an  im- 
portant place  in  our  Federal  fiscal  system. 

159.  Defects  Occur  in  Federal  Income  Taxation. — It  is 
too  much  to  expect  that  a  system  so  new,  and  one  which 
has  been  expanded  to  such  an  extent  within  a  short  period 

1  See  p.  465.    For  changes  made  in  1921  see  p.  483. 


INCOME  TAXES  305 

of  time,  would  possess  a  perfection  which  leaves  nothing 
to  be  desired.  While  there  has  been  no  outstanding 
objection  to  the  plan,  and  while  it  has  been  responsible 
for  a  substantial  amount  of  the  Federal  resources,  yet  some 
defects  have  appeared  which  it  will  be  well  for  Congress 
to  heed  when  attempts  are  made  to  remodel  the  law. 

One  of  the  first  defects  to  be  noticed  is  the  assessment 
procedure.  Practically  absolute  reliance  is  placed  upon 
the  recipient  of  the  income  to  turn  in  the  proper  amount 
to  the  internal  revenue  collector  of  his  district.  After 
examination  the  collector  may  increase  the  return  but 
cannot  lower  it.  The  return  is  certified  by  the  district 
collector  to  the  Commissioner  of  Internal  Revenue,  who 
is  given  a  maximum  of  five  years  in  which  to  make  an 
official  assessment.  This  assessment  occurs  when  the 
commissioner  has  reason  to  disagree  with  the  assessment 
the  taxpayer  has  imposed  against  himself.  In  the  mean- 
time the  recipient  of  an  income  continues  to  pay  the  tax 
which  he  has  assessed  against  himself,  with  little  evidence 
of  official  procedure.  Closer  official  scrutiny  and  pro- 
cedure than  that  just  indicated  would  much  more  nearly 
accord  with  American  ideas  of  tax  procedure. 

The  strict  secrecy  with  which  all  returns  of  incomes  are 
held  is  another  feature  of  the  Federal  income  tax  proce- 
dure for  which  there  can  be  little  justification.  There  is 
nothing  about  an  income  which  connects  it  so  inseparably 
with  the  individual  that  it  should  be  hidden  from  the 
knowledge  of  every  other  person.  Access  to  the  various 
returns  by  officials  would  give  material  aid  in  helping  to 
solve  the  numerous  problems  which  arise.  Many  other 
valuable  uses  of  such  information  will  readily  occur  to 
the  reader,  especially  if  he  be  interested  in  the  economic 
condition  of  individuals  of  various  groups  and  occupations. 

Some  of  the  conditions  of  the  law  necessarily  inflict 
undesirable  burdens.  One  of  these  is  the  failure  to  make 
provision  for  the  recognition  of  any  other  tax  year  than 
the  one  provided  by  the  law.  This  places  an  unnecessary 


30G  OUTLINES  OF  PUBLIC  FINANCE 

hardship  on  business  units  whose  accounting  year  does 
not  correspond  with  the  tax  year,  in  that  it  necessitates 
additional  and  difficult  calculations.  The  taxation  of  the 
earnings  of  corporations,  moreover,  works  an  injustice 
upon  some  recipients  of  dividends.  One  individual  whose 
total  income  may  be  below  the  exemption  limit  may 
secure  a  part  of  it  in  the  form  of  dividends  which  have 
borne  the  tax,  while  another  individual  with  the  same 
income  from  other  sources  would  not  be  burdened.  Some 
plan  of  effective  and  accessible  refunds  would  aid  in 
establishing  justice  between  different  individual  taxpayers. 

1 60.  Income  Taxes  Have  Been  Used  by  Several  States. 
— The  use  of  income  taxes  as  a  part  of  the  fiscal  system  of 
states  is  looked  upon  by  many  as  an  innovation.  There 
has  never  been  a  time,  however,  when  one  or  more  of  the 
states  has  not  had  the  income  tax  in  some  form  as  a  part 
of  its  fiscal  machinery.  Even  in  a  number  of  the  Colonies 
income  was  used  as  a  partial  measure  for  determining  the 
proper  base  for  assessment.  Some  of  these  Colonial  taxes 
were  continued  long  after  the  state  governments  were 
formed.  Some  states  have  used  the  tax  rather  consistently, 
while  others  have  made  only  sporadic  and  half-hearted 
attempts  to  put  it  into  force.  The  tax  at  present  is  used 
with  a  greater  or  less  degree  of  success  in  twelve  or  more 
states. 

Tax  in  Wisconsin. — The  two  states  which  have  used 
the  income  tax  most  successfully  in  recent  years  are  Wis- 
consin and  Massachusetts.  Wisconsin  has  used  this  form 
of  revenue  since  1911,  while  Massachusetts  introduced  it 
in  1916.  The  Wisconsin  tax  is  assessed  against  individ- 
uals and  corporations.  The  law  explicitly  states  who 
shall  be  taxed,  what  deductions  and  exemptions  shall  be 
allowed,  the  rates  that  shall  be  imposed,  and  the  method 
of  administration.  An  exemption  of  $800  is  allowed  to 
an  individual,  $1,200  to  husband  and  wife,  and  $200  for 
each  dependent.  The  grades  range  by  steps  of  $1,000  up 
to  $12,000,  and  the  rate  is  progressive  from  1  per  cent  to 


INCOME  TAXES  307 

6  per  cent.  For  corporations  the  grades  range  by  steps 
of  $1,000  to  $7,000  and  the  rate  is  progressive  from 
2  to  6  per  cent.  Central  administrative  machinery  is 
provided,  which  accounts  in  a  measure  for  the  success 
of  the  system. 

The  larger  part  of  the  Wisconsin  income  tax  has  been 
secured  from  corporations.  The  total  amount  collected 
the  first  year  was  about  one  and  a  half  million  dollars, 
while  the  collection  in  1918  was  nearly  seven  million  dol- 
lars. The  state  tax  commission  characterized  the  system 
as  follows: l 

Results  have  been  satisfactory.  The  increase  in  the  tax  ...  is  gen- 
eral throughout  the  state.  The  gradual  and  steady  increase  is  doubtless 
due,  first  to  the  fact  that .  .  .  there  is  a  steady  growth  in  business  from 
year  to  year,  and  second,  because  of  the  increased  efficiency  of  admin- 
istration. The  conclusion  from  the  foregoing  is  that  a  constant  increase 
in  revenue  from  income  taxation  may  be  confidently  expected. 

Tax  in  Massachusetts. — The  Massachusetts  law  does 
not  attempt  to  go  as  far  as  the  Wisconsin  plan,  yet  has 
been  remarkably  successful  as  a  revenue  producer,  and  as 
providing  an  elastic  feature  to  the  tax  system.  Corporate 
incomes  are  not  included,  and  progression  is  not  used. 
Large  classes  of  incomes  are  exempt,  so  that  little  more 
than  personal  incomes  are  included  under  the  provisions 
of  the  law.  Incomes  are  classified,  and  are  taxed  at  dif- 
ferent rates.  The  amount  collected  in  1918  was  over 
fourteen  million  dollars,  more  than  one  third  of  the 
amount  collected  by  the  Federal  government  from  in- 
comes in  the  state.  This  record  outdistanced  that  of  any 
other  state. 

Tax  in  Other  States. — It  is  significant  that  four  states 
adopted  the  income  tax  in  1919,  and  that  others  are  con- 
sidering it.  One  of  the  four  was  New  York,  and  interest 
centers  here  since  it  is  the  state  of  many  and  large  incomes. 
More  than  one  third  of  the  personal  income  taxes  collected 

1  Report  of  the  Wisconsin  State  Tax  Commission,  1918, 


308  OUTLINES  OF  PUBLIC  FINANCE 

by  the  Federal  government  come  from  this  state.    The  use 
of  a  moderate  progression  is  being  attempted.1 

The  attempts  to  use  the  income  tax  in  the  states  are  so 
different,  are  being  tried  under  such  a  variety  of  circum- 
stances, and  with  such  varying  degrees  of  administrative 
efficiency,  that  generalizations  cannot  be  made  as  to  its 
success.  The  results  in  such  states  as  Wisconsin  and 
Massachusetts,  however,  indicate  the  possibilities  of  state 
income  taxes  when  care  is  exercised  in  formulating  and 
administering  the  law.  As  demands  for  more  revenue 
present  themselves,  and  as  the  old  system  of  property 
taxes  becomes  more  distasteful,  a  wider  use  of  income 
taxes  as  a  source  of  state  revenue  may  be  expected. 

ADDITIONAL  READING 

Kennan,  Income  Taxation. 

Seligman,  The  Income  Tax. 

American  Economic  Review,  vol.  iv,  pp.  791-815;  vol. 
vi,  pp.  837-850. 

Proceedings  of  the  National  Tax  Association,  1920,  pp. 
274-331. 


1  For  drafts  of  "  model "  laws  for  taxing  personal  and  business  incomes, 
e  The  Bulletin  of  the  National  Tax  Association,  January,  1921 


CHAPTER  XIV 

INHERITANCE   TAXES  l 

161.  The  Inheritance  Tax  Is  Not  of  Recent  Origin. — A 
somewhat  detailed  study  of  the  theory,  advantages,  and 
defects  of  the  inheritance  tax  is  warranted,  because  so 
much  importance  has  been  attached  to  it  in  recent  years, 
and  because  this  form  of  revenue  is  likely  to  be  of  impor- 
tance in  the  future.  To  the  uninitiated,  who  come  upon 
its  extended  discussion  in  comparatively  recent  years,  this 
principle  appears  as  a  modern  development  in  fiscal  policy. 
The  great  increase  in  the  need  for  revenue  has  led  fiscal 
authorities  to  attach  more  importance  to  taxing  inheri- 
tances, while  the  piling  up  and  bequeathing  of  enormous 
fortunes  has  led  many  to  look  upon  the  principle  as  a 
valuable  social  weapon.  Principally  because  it  can  be 
used  to  encourage  a  social  equality,  and  because  it  acts 
as  a  means  for  a  fairer  distribution  of  tax  burdens,  the 
inheritance  tax  has  found  its  most  extensive  development 
in  the  more  democratic  countries,  such  as  Great  Britain, 
Switzerland,  and  the  United  States. 

Tax  in  Ancient  States. — It  is  an  error,  however,  to  con- 
sider the  taxation  of  inheritances  as  belonging  exclusively 
to  modern  fiscal  systems.  As  a  matter  of  fact,  some  form 
of  levy  upon  the  transfer  of  property  at  death  dates  back 
as  far  as  authentic  records  can  be  obtained.  Some  traces  of 
the  use  of  the  principle  can  be  found  as  early  as  2000  B.C. 
It  appears  that  a  well-defined  system  of  levies  on  property 

1  The  material  in  this  chapter  is  much  the  same  as  that  contained  in  an 
article  by  the  author  in  The  Annals  of  the  American  Academy  of  Political 
and  Social  Science  for  May,  1921, 


310  OUTLINES  OF  PUBLIC  FINANCE 

successions  existed  in  Egypt  for  a  number  of  years  before 
the  Christian  era.  The  Emperor  Augustus,  moreover, 
used  a  tax  on  property  transfers  very  early  after  the  birth 
of  Christ.  He  desired  to  provide  a  fund  for  the  pensioning 
of  old  soldiers  and  proposed  a  tax  of  one  twentieth  upon 
inheritances,  which  he  secured  by  the  consent  of  the 
Senate  only  after  he  threatened  to  use  the  direct  land  tax. 
No  distinction  was  made  between  bequests  to  relatives 
and  strangers,  and  only  a  low  exemption  was  allowed. 
Some  of  the  later  rulers  somewhat  alleviated  the  strin- 
gency of  the  law  by  the  recognition  of  family  ties  and 
dependency,  exempting  in  consequence  some  of  the  more 
direct  bequests,  such  as  between  mother,  father,  and 
children.  Still  later  these  exemptions  were  removed,  and 
the  law  was  made  even  more  stringent  than  it  had  been 
at  first,  but  was  again  modified  before  the  tax  was  given 
up,  probably  somewhere  near  the  beginning  of  the  fourth 
century. 

Tax  in  Middle  Ages. — A  semblance  of  the  modern  in- 
heritance tax  is  found  in  the  system  of  reliefs  which  existed 
in  the  Middle  Ages.  At  the  death  of  a  tenant,  the  right 
of  the  tenancy  to  pass  to  his  heir  was  recognized,  yet  some 
exaction  was  made  by  the  landlord.  As  long  as  the  amount 
could  be  voluntarily  determined  by  the  landlord,  extor- 
tionate demands  were  often  made,  which  practice  led  to 
the  establishment  of  uniform  rates  by  legislation.  These 
duties  were  found  in  a  number  of  countries,  as  well  as 
another  class  of  duties  which  was  levied  upon  the  transfer 
of  property  other  than  land.  After  the  breakdown  of  the 
feudal  system  these  duties  of  course  went  out  of  existence. 
Sporadic  attempts  were  made,  however,  to  use  some  form 
of  succession  levy,  especially  in  the  countries  on  the 
Continent,  which  finally  resulted  in  the  formulation  of 
permanent  inheritance  tax  laws.  It  is  readily  compre- 
hended, therefore,  that  inheritance  taxes  are  not  products 
of  modern  minds,  but  hare  had  a  long  course  of  develop^ 
ment, 


INHERITANCE  TAXES  311 

162.  The  Inheritance  Tax  Was  Much  Discussed  by 
Early  Economists. — In  their  discussion  of  ways  and  means 
for  obtaining  revenue,  the  early  writers  on  fiscal  subjects 
generally  gave  space  to  a  consideration  of  inheritance 
taxes.  Adam  Smith  opposed  the  tax  because  it  did  not 
conform  to  his  canons  of  taxation,  and  increased  the 
transfer  of  capital,  which  was  the  basis  of  productive  labor 
of  individuals,  to  the  use  of  the  state,  the  most  of  whose 
activities  were  unproductive.  He  did  admit,  however, 
that  when  property  descended  to  others  than  dependents, 
it  might  be  taxed  without  a  feeling  of  any  very  great 
inconvenience.  Ricardo  objected  to  the  tax  on  the  ground 
that  it  was  a  capital  levy.  His  reasoning  was  that  if  a 
man  paid  a  tax  of  $100  out  of  a  bequest  of  $1,000,  he 
would  have  no  inclination  to  save  the  amount  of  the  tax, 
but  would  consider  the  bequest  as  one  of  $900.  If,  how- 
ever, he  were  allowed  the  bequest  of  $1,000,  and  then 
were  assessed  the  amount  of  the  tax  on  some  objects  of 
consumption,  he  would  retrench  expenditures  in  order  to 
save  the  necessary  amount. 

Views  of  Mill  and  Bentham. — While  many  other  early 
writers  found  objection  to  the  principle,  John  Stuart  Mill 
and  Jeremy  Bentham  were  advocates  of  inheritance  taxes 
in  the  extreme.  Mill  took  the  view  that  inheritances, 
other  than  to  near  relatives,  should  be  abolished;  that  the 
amount  which  could  be  received  by  bequest  should  be 
strictly  limited,  and  that  rates  should  be  progressive.  He 
denied  any  right  of  inheritance,  and  contended  that  both 
individuals  and  society  would  be  better  off  if  no  one  were 
freed  from  the  necessity  of  working  by  the  receipt  of  a 
large  fortune. 

Bentham  favored  the  plan  because  he  thought  it  would 
produce  revenue  with  the  minimum  of  sacrifice.  He  ex- 
pressed his  position  in  the  form  of  a  paradoxical  question : 
"What  is  that  mode  of  supply,  of  which  the  twentieth 
part  is  a  tax,  while  the  whole  would  be  no  tax  and  would 
not  be  felt  by  anybody?"  He  contended  that  this  situa- 


312  OUTLINES  OF  PUBLIC  FINANCE 

tion  would  be  accomplished  if  the  power  of  bequest  of 
persons  having  no  direct  heirs  were  regulated,  and  that 
all  cases  of  intestacy — descent  of  property  when  no  will 
had  been  made — be  abolished,  except  in  an  immediate 
family.  A  person  who  had  expected  no  inheritance  would 
feel  no  burden  if  the  state  took  the  entire  amount.  If, 
however,  an  estate  had  been  given  to  him,  and  then  a 
part  taken  for  taxes,  the  burden  at  once  would  be  ap- 
parent. These  opinions  are  but  representative  of  many 
expressed  by  early  writers  on  economic  topics. 

163.  The  Inheritance  Tax  Is  Widely  Advocated  at  Pres- 
ent.— It  is  not  necessary,  however,  to  turn  to  an  earlier 
age  to  find  a  defense  of  the  inheritance  tax.  Much  of  the 
earlier  opposition  has  broken  down,  and  ardent  supporters 
may  be  found  among  all  classes — among  those  interested 
in  social  as  well  as  fiscal  reform,  and  among  the  rich  as 
well  as  among  the  poor.  It  is  but  natural  that  those  who 
are  socialistically  inclined  should  be  its  ardent  champions, 
for  the  tax  easily  can  be  made  a  method  for  the  reduction 
of  large  fortunes.  Those  who  are  concerned  with  securing 
a  more  equal  distribution  of  the  tax  burden  in  accordance 
with  the  ability  to  pay,  and  who  are  only  secondarily  in- 
terested in  social  consequences,  have  come  to  look  upon 
the  inheritance  tax  as  a  valuable  addition  to  the  fiscal 
system.  Fiscal  authorities,  both  Federal  and  state,  in  the 
severe  pressure  for  funds  which  has  continually  arisen 
within  recent  years,  have  been  glad  to  turn  to  this  pre- 
viously little  used  source  of  revenue  to  replenish  an  empty 
treasury.  Still  others  sanction  the  use  of  a  severe  taxa- 
tion of  inheritances,  not  primarily  for  an  equalization  of 
wealth  per  se,  nor  as  a  source  of  revenue,  but  because  of 
the  good  effects  which  a  limitation  of  fortunes  would  have 
upon  the  recipients. 

Views  of  Andrew  Carnegie.* — An  interesting  example  of 
an  advocate  of  the  extreme  use  of  inheritance  taxes  to 

1  Mr.  Carnegie's  views  on  inheritances  are  elaborated  in  his  book,  Th c 
Gospel  of  Wealth. 


INHERITANCE  TAXES  313 

secure  the  result  just  indicated,  was  the  late  Andrew  Car- 
negie. He  held,  in  his  numerous  speeches  and  writings, 
that  it  was  a  mark  of  misguided  affection  for  parents  to 
leave  great  fortunes  to  their  children,  especially  to  sons. 
To  do  so  deadens  the  talents  and  energies,  and  results  in 
a  less  useful  life  than  would  otherwise  develop.  A  man, 
he  thought,  should  be  prevented  from  handicapping  his 
son  by  bestowing  great  wealth  upon  him.  He  believed, 
further,  that  the  proper  use  of  great  riches  was  to  benefit 
society  from  which  they  had  been  taken.  If,  then,  men 
persisted  in  amassing  fortunes  without  making  a  just 
social  return,  the  state  should  make  sure  of  its  proper 
share  by  the  use  of  an  inheritance  tax.  He  advocated  a 
steeply  progressive  tax  to  as  high  as  50  per  cent,  and 
believed  that  a  large  part  of  the  needed  revenue  could  be 
secured  from  this  source,  with  the  feeling  of  very  little 
burden. 

Labor  organizations  of  various  kinds,  as  might  be  ex- 
pected, as  well  as  the  members  of  the  more  radical  political 
parties,  have  been  enthusiastic  supporters  of  this  principle. 
Theodore  Roosevelt  is  an  example  of  a  national  states- 
man and  leader  who  thoroughly  believed  in  the  justice 
of  the  tax. 

164.  Some  Justify  the  Inheritance  Tax  as  a  Regulator 
of  Fortunes. — There  is  no  part  of  any  fiscal  system  which 
has  had  so  many  and  diverse  arguments  advanced  in  its 
favor  as  a  tax  upon  the  transfer  of  property  at  death. 
These  range  all  the  way  from  arguments  of  a  purely  social 
nature  to  those  justifying  the  principle  as  a  part  of  the 
fiscal  machinery.  The  social  arguments,  for  the  most 
part,  look  to  the  limitation  of  fortunes,  and  follow  closely 
the  ideas  of  Bentham  and  Carnegie. 

Extension  of  Escheat. — One  common  argument  for  the 
inheritance  tax  is  known  as  the  extension  of  escheat.  This 
is  based  upon  the  ground  that  there  is  no  natural  right  of 
inheritance — that  the  state  has  gone  a  long  way  in  allow- 
ing an  individual  to  have  control  over  property  while 


314  OUTLINES  OF  PUBLIC  FINANCE 

alive,  but  would  be  going  entirely  too  far  to  allow  him  to 
have  control  over  it  after  death.  The  disposition  of 
property  after  death,  then,  is  really  a  state  function,  and 
it  is  a  matter  for  the  state  to  decide  to  what  extent  prop- 
erty shall  be  inherited.  Under  this  theory  there  is  little 
basis  for  the  justification  of  collateral  inheritance1  while  it 
becomes  the  duty  of  the  state  to  decide  to  what  extent,  and 
under  what  conditions,  direct  inheritance  shall  be  permitted. 

Diffusion  of  Wealth. — The  argument  which  has  branded 
the  inheritance  tax  as  "  Socialistic "  has  been  what  is 
usually  known  as  the  diffusion  of  wealth  argument — that 
is,  the  use  of  the  principle  to  break  up  large  fortunes. 
Many  proposals  have  been  made,  and  some  laws  have 
been  enacted  with  this  idea  in  mind.  It  has  been  proposed, 
for  example,  to  fix  a  maximum  amount  beyond  which 
inheritance  would  not  be  permitted,  while  the  rate  of 
progression  which  has  been  used  more  or  less  reflects  the 
limitation  which  is  intended  to  be  put  upon  inherited 
fortunes.  The  use  of  the  tax  for  this  purpose  need  not, 
however,  be  condemned  as  a  Socialistic  measure,  for  it 
may  be  desirable  to  limit  the  size  of  fortunes  for  other 
reasons  than  the  mere  diffusion  or  equalization  of  wealth. 

If,  as  Mr.  Carnegie  contended,  the  moral,  social,  and 
economic  efficiency  of  the  state  is  impaired  because  the 
succession  of  large  fortunes  destroys  the  initiative  of  the 
recipient,  then  it  becomes  the  duty  of  the  state  to  impose 
regulation.  Inheritance  taxes,  from  this  viewpoint,  would 
properly  come  under  the  jurisdiction  of  the  police  power 
when  levied  by  the  commonwealths.  Since,  moreover, 
the  right  of  inheritance  is  not  considered  a  natural  right, 
but  one  granted  by  the  state,  any  limitation  which  the 
state  may  see  fit  to  impose  must  be  considered  justifiable, 
and  not  an  encroachment  on  the  right  of  private  property. 

1  By  a  collateral  inheritance  is  meant  the  devolution  of  property  to  non- 
relatives  and  distant  relatives,  as  cousins,  nephews,  and  nieces.  A  direct 
inheritance  refers  to  one  in  the  immediate  family,  as  between  husband, 
wife,  son,  daughter,  and  sometimes  brother  and  sister. 


INHERITANCE  TAXES  315 

165.  The  Benefit  Theory  Has  Been  Applied  to  Taxing 
Inheritances. — Some  advocates  of  the  inheritance  tax 
claim  that  it  is  only  because  of  the  action  of  the  state 
that,  in  the  first  place,  there  is  an  accumulation  of  wealth, 
and  in  the  second  place,  that  a  transmission  of  this  wealth 
is  allowed;  consequently,  the  state  is  justified  in  exacting 
a  part  of  the  wealth  of  the  decedent. 

Expense  of  Service. — The  mere  transmission  of  wealth 
at  death  inevitably  places  some  burden  upon  the  state, 
with  an  accompanying  expense.  Court  officials  must  be 
maintained  for  the  purpose  of  making  the  transfer  in  a 
proper  manner,  and  of  guaranteeing  the  title  to  property. 
While  these  are  maintained  primarily  for  the  benefit  of 
the  public,  yet  at  the  same  time  a  special  benefit  is  con- 
ferred for  which  it  is  perfectly  proper  to  make  some  exac- 
tion. From  the  nature  of  the  case,  and  in  comparison 
with  other  similar  court  services,  the  payment  required 
would  be  no  more  than  the  cost  of  rendering  the  service. 
This  would  be  a  fee  payment  and  could  scarcely  be  classed 
as  a  tax.  The  payment  would  necessarily  be  small  and 
there  would  be  no  place  for  progressive,  nor  even  pro- 
portionate rates.  A  uniform  charge  for  a  bequest  of  any 
size  would  be  the  most  logical,  since  the  cost  to  the 
court  would  vary  but  little  with  the  size  of  the  estate. 
This  principle  is  the  chief  consideration  in  some  of  our 
states  in  their  laws  relating  to  the  levies  placed  upon 
inheritances. 

Value  of  Service. — A  more  strict  application  of  the 
benefit  theory  is  found  when  it  is  claimed  that  a  state 
should  exact  an  amount  based  upon  the  value  of  its  serv- 
ice to  the  recipient  of  the  transfer.  The  argument  goes 
back  to  the  principle  that  there  is  no  natural  right  to 
transfer  property  after  death.  Since  this  is  true,  the  state 
has  conferred  a  benefit  upon  the  recipient  by  establishing 
the  institution  of  inheritance,  and  thereby  making  it  pos- 
sible for  the  transfer  to  exist.  A  valuable  benefit  has 
thereby  been  conferred,  and  payment  should  be  exacted 


316  OUTLINES  OF  PUBLIC  FINANCE 

for  this  benefit.  The  state  furthermore  looks  after  the 
safe  transfer  of  the  property,  and  places  the  title  securely 
in  the  hands  of  the  recipient,  which  enhances  the  value  of 
the  benefit.  The  difficulty  with  this  argument  is  the  diffi- 
culty with  the  whole  theory  of  benefit  as  a  base  for  taxes. 
To  measure  accurately  the  value  of  these  benefits  in  each 
particular  case  would  be  impossible,  and  the  justice  of  the 
tax  would  then  vary  according  to  the  accuracy  of  the 
measurement. 

Partnership  of  State. — Still  another  application  of  the 
principle  of  benefit  is  found  in  the  concept  that  the  state 
is  a  partner  to  the  accumulation  of  wealth,  and  at  the 
death  of  the  holder  is  entitled  to  its  share,  rather  than 
have  the  whole  estate  pass  to  some  one  who  was  only 
remotely,  or  not  at  all,  instrumental  in  its  production. 
Since  it  has  been  through  the  contributions  of  society  that 
large  fortunes  have  grown,  society  has  the  right  to  demand 
some  return.  This  return  may  be  secured  through  a  con- 
tribution to  the  government  at  the  death  of  the  holder 
of  the  accumulated  fortune.  The  difficulty  of  measure- 
ment again  presents  itself  in  both  of  these  cases.  That 
the  state  and  society  are  instrumental  in  the  accumulation 
of  individual  wealth  is  an  outstanding  fact,  and  it  is  for 
such  intangible  and  immeasurable  services  that  taxes  in 
general  are  partially  levied.  The  principle  of  benefit,  how- 
ever, in  tax  levies,  has  been  all  but  discarded. 

1 66.  The  Inheritance  Tax  Conforms  to  Modern  Fiscal 
Concepts. — A  consideration  of  justice  in  taxation  reveals 
that,  through  a  process  of  evolution,  the  most  commonly 
accepted  principle  for  the  levy  of  taxes  is  ability  to  pay, 
with  perhaps  some  consideration  for  the  utilitarian  prin- 
ciple of  the  greatest  good  to  the  greatest  number.  To 
students  of  fiscal  problems,  at  least,  a  study  of  the  inheri- 
tance tax  from  this  standpoint  assumes  the  role  of  primary 
importance.  Many  arguments  have  been  advanced  to 
justify  its  place  in  fiscal  systems,  some  of  which  are 
worthy  of  review. 


INHERITANCE  TAXES  317 

Payment  of  Back  Taxes. — One  of  the  earlier  contentions 
for  the  tax  was  that  it  was  but  a  collection  of  the  taxes 
which  had  not  been  paid  while  the  fortune  was  in  the 
process  of  accumulation.  This  is  commonly  called  the 
back  tax  argument.  The  reasoning  has  been  effective, 
and  not  without  foundation,  because  of  the  widespread 
evasion  of  personal  property  taxes.  In  fact,  this  argu- 
ment, perhaps,  has  been  used  more  extensively  than  any 
other  in  securing  inheritance  tax  legislation.  From  the 
point  of  pure  justice,  however,  the  reasoning  cannot  stand. 
The  evasion  of  taxes  for  different  accumulations  of  wealth 
has  by  no  means  been  the  same,  and  yet  it  is  impossible 
to  attempt  any  discriminations  on  the  basis  of  the  extent 
that  taxes  have  been  evaded.  In  this  respect  it  is  a  tax 
which  falls  alike  upon  the  just  and  the  unjust. 

A  slightly  different  argument,  and  one  whose  force  is 
somewhat  diminished  since  the  extensive  introduction  of 
income  taxation,  is  that  the  inheritance  tax  represents  the 
payment  of  a  tax  which  should,  in  justice,  have  been 
levied  during  the  life  of  the  decedent.  It  is  simply  ac- 
cumulation of  past  property  taxes,  or  income  taxes,  which 
were  never  levied  and  which  are  collected  at  the  most 
convenient  time — when  the  individual  has  no  more  need 
for  his  accumulations. 

Conformity  to  Ability  to  Pay. — The  inheritance  tax,  in 
large  measure,  conforms  to  the  principle  of  ability  to  pay. 
The  payment  of  no  other  tax  is  perhaps  so  lightly  felt. 
It  is  paid  after  the  property  leaves  the  hands  of  the  de- 
cedent, and  before  it  reaches  those  of  the  recipient.  An 
inheritance  is  a  sudden  and  often  unexpected  receipt  of 
property.  This  additional  property  creates  taxpaying 
ability,  but  never  is  the  ability  so  great  as  before  the 
property  enters  into  the  activities  of  the  benefactor.  In 
a  few  cases,  of  course,  this  increase  in  ability  fails  to 
materialize,  as  when  a  provident  husband  is  taken  from 
a  wife  and  dependent  children.  Such  situations  are  the 
exception,  however,  and  can  easily  be  cared  for  by  the 


318  OUTLINES  OF.  PUBLIC  FINANCE 

formulation  of  the  law.  The  tax  may  be  the  source  of 
much  revenue,  with  a  minimum  of  sacrifice  and  a  small 
derangement  of  enterprise,  and  in  this  respect  corresponds 
to  the  modern  utilitarian  ideals  of  justice. 

It  is  not  surprising  to  find  persons  who  are  recognized 
as  conservative  and  yet  who  are  ardent  enthusiasts  for 
the  inheritance  tax.  With  the  constant  growth  in  the 
functions  of  the  state,  the  demands  for  revenue  from  the 
old  sources  began  to  cut  deeply,  and  some  relief  through 
this  little-used  source  is  looked  upon  with  pleasure.  The 
ease  with  which  the  burden  is  carried  also  makes  a  strong 
appeal.  Where  to  get  the  funds  to  carry  on  many  desir- 
able state  functions  is  a  pressing  problem  for  which  the 
inheritance  tax  may  be  used  as  a  partial  solution.  Many 
believe,  further,  that  a  proper  use  of  this  tax  would  cure 
much  of  the  Socialistic  agitation  against  wealth,  since 
there  is  very  little  unearned  and  idle  wealth  outside  of 
inheritances. 

167.  Many  Objections  to  the  Inheritance  Tax  Are  Weak. 
— Blakemore  and  Bancroft,  in  their  book  on  inheritance 
taxes,  say: 

Firmly  entrenched  in  a  long  and  honorable  history,  with  the  en- 
dorsement of  the  leading  economists  of  ancient  and  modern  times, 
and  approved  by  the  present  practice  of  most  civilized  governments, 
he  would  be  indeed  brave  who  should  attempt  to  attack  the  theory 
or  validity  of  any  sane  inheritance  tax  from  an  economic  standpoint.1 

Professor  Underwood  has  characterized  the  tax  as  follows : 

A  defense  of  the  taxation  of  inheritances  is  superfluous.  Its  exist- 
ence in  all  but  a  few  of  the  civilized  nations,  and  in  all  but  a  few  of  the 
more  backward  states,  is  its  chief  defense.2 

Use  as  Penalty. — These  quotations  indicate  with  what 
esteem  the  inheritance  tax  is  looked  upon.  Most  of  the 
objections  arise  to  some  of  the  reasons  for  advocating  the 

1  Blakemore  and  Bancroft,  Inheritance  Taxes,  p.  9. 

2  J.  H.  Underwood,  State  and  Lqcal  Taxation,  ypl.  i.  p.  211., 


INHERITANCE  TAXES  319 

tax,  and  because  of  difficulty  in  getting  a  proper  adminis- 
tration of  the  law.  The  use  of  the  tax  to  penalize  fortunes 
which  have  been  amassed  in  an  illegitimate  or  fraudulent 
manner,  is  open  at  once  to  the  objection  that  there  is  no 
way  of  differentiating  the  rate  directly  with  the  amount 
of  evil  connected  with  securing  the  estate.  Rates  have 
been  made  to  vary  with  size  of  the  bequest,  and  with  the 
degree  of  relationship,  but  neither  of  these  is  any  indica- 
tion of  the  manner  by  which  the  bequest  originated. 
Many  small  accumulations  involve  a  larger  amount  of 
dishonesty  than  many  of  the  larger  ones,  and  to  penalize 
them  properly  the  rates  would  necessarily  be  regressive. 
This,  however,  cannot  be  used  as  an  objection  to  the  tax, 
but  only  to  its  use  for  a  particular  purpose. 

Tax  upon  Savings. — The  objections  that  the  tax  will 
discourage  savings,  and  that  it  can  be  easily  evaded  by 
gifts  before  death,  really  have  little  foundation.  In  fact, 
few  taxes  tend  to  discourage  savings  as  little  as  a  tax 
which  does  not  come  until  after  death.  To  most  individ- 
uals this  appears  as  an  event  in  the  remote  future,  and  a 
tax  at  such  a  time  will  have  little  influence  on  present 
property  accumulations.  It  may,  on  the  other  hand,  in 
some  cases,  be  an  incentive  to  greater  savings.  To  the 
provident  husband  and  father,  who  wishes  to  leave  a 
certain  legacy  to  wife  or  children,  the  certainty  of  a  tax 
deduction  will  necessitate  the  accumulation  of  a  larger 
amount.  Until  a  material  change  occurs  in  human  nature, 
the  evasion  of  the  tax  by  a  distribution  of  property  before 
death  will  be  insignificant.  Most  men  wish  to  retain  their 
property  while  they  are  alive,  and  would  rather  the  state 
secure  a  part  of  it  at  death  than  give  up  the  privilege  of 
retaining  it  in  their  possession  while  they  are  yet  alive. 

Tax  of  Varying  Frequency. — The  objections  that  the 
tax  falls  with  varying  frequency  upon  different  accumula- 
tions, and  that  it  falls  upon  capital  rather  than  upon 
income,  are  no  more  serious.  It  is  no  doubt  true  that 
transfers  of  property  occur  more  frequently  in  some  fam- 


320  OUTLINES  OF  JPUBLIC  FINANCE 

ilies  than  in  others,  and  when  this  situation  exists  a  greater 
percentage  passes  to  the  state.  The  burden,  however,  is 
felt  by  a  different  individual  with  each  levy  of  the  tax — 
it  falls  upon  a  newly  created  ability  to  meet  a  tax  burden. 
Any  hardship  which  may  arise  in  the  case  of  direct  heirs 
can  be  alleviated  by  a  system  of  exemptions,  or  by  allow- 
ing a  lapse  of  a  certain  number  of  years  before  a  second 
tax  will  be  placed  upon  the  same  property. 

That  the  burden  falls  upon  capital  is  sometimes  true, 
and  it  often  happens  that  the  tax  is  met  from  current 
income.  As  long  as  the  receipts  go  into  the  general  fund, 
the  demand  for  revenue  from  other  sources  is,  to  that 
extent,  lessened.  What  is  paid  in  inheritance  taxes  does 
not  have  to  be  collected  from  income  or  other  taxes.  A 
larger  amount  of  income  can  consequently  be  saved  to 
replace  or  add  to  the  existing  amount  of  capital.  Any 
tax  will  directly  or  indirectly  fall  upon  the  accumulation 
of  capital,  and  the  inheritance  tax  errs  here  to  no  greater 
extent  than  other  taxes. 

1 68.  The  Courts  Have  Strengthened  the  Position  of  the 
Inheritance  Tax. — Hundreds  of  cases  involving  different 
aspects  of  the  inheritance  tax  have  come  before  state  and 
Federal  courts,  and  with  but  few  exceptions  the  decisions 
have  given  this  form  of  revenue  a  firmer  place  in  fiscal 
systems.  Nothing  more  will  be  attempted  here  than  to 
mention  a  few  of  the  more  important  aspects  of  the  tax 
which  have  been  established.1 

The  constitutionality  of  this  form  of  tax  was  formerly 
an  important  question.  In  regard  to  this  Ross  says: 

The  constitutionality  of  the  general  principles  of  inheritance  taxa- 
tion has  been  affirmed  by  a  multitude  of  decisions,  so  that  the  com- 
petency of  Congress,  or  the  legislatures  of  the  several  states,  to  impose 
an  inheritance  tax  is  universally  conceded.  The  inherent  justice  and 

1  Those  who  desire  to  go  extensively  into  this  aspect  of  the  inheritance 
tax  will  do  well  to  consult  the  exhaustive  work,  Inheritance  Taxes,  by 
Blakemore  and  Bancroft,  and  a  similar  work  by  P.  V.  Ross,  Inheritance 

Taxation. 


INHERITANCE  TAXES  321 

wholesomeness  of  this  system  of  taxation  have  so  appealed  to  the 
judicial  mind  that  all  the  assaults  that  wealth,  in  its  aversion  to  bear 
its  just  burdens,  has  conceived,  have  proved  unavailing.  The  general 
doctrine  that  a  state  or  the  United  States  may  raise  revenue,  and  in 
bountiful  quantities,  by  levying  tribute  upon  estates  in  the  course  of 
transmission  from  decedents  to  their  successors,  is  no  longer  doubted, 
and  most  of  the  attacks  now  made  upon  inheritance  taxation  are  upon 
other  than  constitutional  grounds.1 

The  use  of  the  tax  by  the  Federal  government  has  been 
sanctioned  by  the  courts  on  the  ground  that  it  is  an 
indirect  or  excise  tax,  and  therefore  does  not  have  to  fol- 
low the  rule  of  apportionment.  It  has  been  held  further 
that  this  comes  under  the  taxing  power  of  the  Constitu- 
tion, and  is  not  undertaken  for  the  purpose  of  regulating 
the  transmission  of  property.  Since  the  state  govern- 
ments are  governments  of  residual  powers,  there  is  no 
restriction  upon  their  use  of  the  inheritance  tax  unless 
the  restriction  be  imposed  by  their  own  constitutions  or 
statutes.  The  use  of  progressive  rates  has  been  held  not 
to  infringe  upon  the  uniformity  clause  of  many  constitu- 
tions— that  taxes  shall  be  levied  uniformly. 

Inheritance  Not  a  Natural  Right. — The  courts  of  nearly 
every  state — those  of  Massachusetts  and  Wisconsin  being 
the  principal  exceptions — have  held  that  the  right  of  in- 
heritance is  not  a  natural  right,  but  a  privilege  created 
by  the  state,  and  subject  to  whatever  regulations  the  state 
may  see  fit  to  impose.  It  has  been  frequently  held  that 
the  tax  is  in  the  nature  of  an  excise  or  franchise  tax  on  the 
succession  of  the  property,  and  not  on  the  property  itself. 
As  one  decision  describes  it, 

it  is  not  a  tax  upon  the  property  or  money  bequeathed,  but  a  diminu- 
tion of  the  amount  that  otherwise  would  pass  under  the  will,  and 
hence  what  the  legatee  really  receives  is  not  taxed  at  all.  It  is  that 
which  is  left  after  the  tax  has  been  taken  off.  It  is  imposed  only  once, 
and  that  is  before  the  legacy  has  reached  the  legatee  and  before  it 
has  become  his  property.2 

1  P.  V.  Ross,  Inheritance  Taxation,  p.  20. 

2  7/i  re  Finncn,  19G  Pa.  St.  72. 


322  OUTLINES  OF  PUBLIC  FINANCE 

Some  courts  have  held,  however,  that  the  tax  is  on  the 
right  to  receive  property  rather  than  on  the  permission 
or  the  right  to  transmit  it. 

Properly  understood,  it  is  not  the  right  to  transmit,  but  the  right  and 
privilege  to  receive,  that  is  taxed.  ...  It  is  clear  that  the  right  is  dis- 
tinct and  separate  from  the  property  itself,  and  the  state  may  tax 
this  right  to  receive  property.1 

This  brief  summary  of  a  particular  line  of  decisions  in- 
dicates how  firm  a  legal  footing  the  inheritance  tax  has 
attained.  Litigation  involving  inheritance  tax  laws  still 
arises  at  times,  but  it  seldom  has  to  do  with  the  consti- 
tutionality or  the  power  to  impose  such  a  tax.  Many 
technicalities  have  arisen,  but  none  of  the  decisions  have 
vitiated  the  principle  of  inheritance  taxes.  As  far  as  any 
difficulties  may  have  existed  in  the  past  from  the  legal 
viewpoint,  they  may  now  be  considered  as  practically 
settled,  and  legislative  bodies  may  feel  themselves  free  to 
make  an  extended  use  of  the  tax  if  they  have  not  already 
done  so. 

169.  Problems  Arise  in  Formulating  Inheritance  Tax 
Laws. — The  principle  of  the  inheritance  tax  may  be  con- 
sidered just,  and  the  conclusion  may  be  drawn  that  it 
unquestionably  deserves  a  place  in  fiscal  systems.  This, 
however,  does  not  preclude  the  appearance  of  serious 
problems  in  its  adoption  and  use.  Some  of  the  questions 
which  immediately  present  themselves  are:  What  shall  be 
considered  an  inheritance  for  the  purpose  of  taxation? 
What  exemptions  shall  be  allowed?  What  distinction 
shall  be  made  between  near  relatives,  distant  relatives, 
and  strangers?  What  rates  shall  be  applied?  Shall  they 
be  progressive,  and  to  what  extent?  What  provisions 
shall  be  used  to  prevent  evasion,  or  to  prevent  the  tax 
from  becoming  unduly  harsh  upon  particular  estates? 

Deductions  and  Exemptions. — The  first  of  these  questions 
raises  the  problem  as  to  what  should  be  deducted  from  the 

1  State  vs.  Ferris,  53  Ohio  St.  314. 


INHERITANCE  TAXES  323 

gross  amount  of  an  estate  in  order  to  determine  the 
proper  base  for  the  levy  of  the  tax.  All  just  obligations 
against  the  estate,  for  example,  should  be  deducted.  Other 
deductions,  however,  which  are  sometimes  permitted,  are 
not  always  so  easily  justified.  Payments  from  life  insur- 
ance policies  are  usually  not  considered  a  part  of  an  es- 
tate, yet  very  frequently  the  payment  of  insurance  premi- 
ums is  looked  upon  primarily  as  an  investment  with  the 
payment  at  death  as  the  return.  This  is  more  true  of  the 
extremely  large  policies,  and  no  good  reason  appears  for 
allowing  their  deduction. 

Closely  connected  with  the  proper  deductions  is  the  de- 
termination of  the  amount  of  exemption  to  be  allowed, 
and  differentiation  according  to  the  degree  of  relationship. 
The  soundest  approach  to  a  solution  of  these  problems  is 
through  an  attempt  to  measure  the  relative  abilities  con- 
ferred by  the  estate.  In  the  case  of  a  small  amount  left 
to  a  widow  or  dependent  child,  there  is  evidently  no  in- 
crease in  ability  to  meet  burdens,  and  consequently  no 
tax  should  be  levied.  Where  the  estate  is  large,  however, 
a  tax  may  be  levied,  and  no  appreciable  hardship  will 
result.  In  the  case  of  distant  relatives  and  strangers  in 
blood,  the  income  is  much  more  of  an  accidental  nature, 
and  consequently  less  reason  exists  for  allowing  an  exemp- 
tion. The  nature  of  the  recipient  has  also,  at  times,  justly 
received  consideration.  Bequests  to  public,  religious,  and 
charitable  institutions,  for  example,  have  not  been  con- 
sidered as  subject  to  the  inheritance  tax. 

Inheritance  Tax  Rates. — The  question  of  the  rate  which 
shall  be  levied  is  also  of  importance.  Shall  it  be  low  or 
'high,  proportional  or  progressive,  and  to  what  degree 
should  it  vary  for  direct  and  collateral  heirs?  As  to  the 
size  of  the  rate,  there  has  been  absolutely  no  uniformity. 
In  some  countries  it  has  been  high,  and  in  others  very 
low,  while  many  variations  exist  in  parts  of  the  same 
country.  The  rate  will  be  governed  somewhat  by  the 
purpose  which  the  tax  is  designed  to  accomplish.  If  it  is 


324  OUTLINES  OF  PUBLIC  FINANCE 

designed  to  prevent  the  succession  of  large  fortunes,  the 
rate  will  doubtless  be  high.  If  it  is  considered  that  the 
state  should  exercise  little  interference  with  property 
transfers,  the  rates  will  be  low,  as  they  will  be,  also,  if  it 
is  feared  high  rates  will  cause  evasion. 

There  has  been  little  question  concerning  the  advis- 
ability of  progressive  rates,  but  much  discussion  has  arisen 
over  the  steepness  of  the  rate  of  progression,  and  how  it 
should  be  affected  by  relationship.  Those  who  would 
limit  the  amount  of  wealth  which  can  be  transferred  to  a 
comparatively  small  amount,  would  have  the  rate  steeply 
progressive  to  100  per  cent.  Others  would  have  it  only 
moderately  progressive  on  bequests  to  direct  heirs,  steeply 
progressive  on  bequests  to  near  relatives,  and  still  more 
steeply  progressive  on  bequests  to  others. 

It  is  important,  too,  when  a  progressive  rate  is  levied, 
whether  the  base  for  the  levy  be  considered  the  estate,  or 
the  individual  share  in  the  estate.  Suppose  that  in  an 
estate  of  $100,000  one  individual  is  to  receive  $10,000, 
another  $40,000,  another  $30,000,  and  still  another  $20,- 
000.  If  the  tax  were  a  proportional  rate  of  5  per  cent  it 
could  make  no  difference  whether  it  were  levied  upon  the 
entire  estate  or  upon  each  individual  share.  If  a  progres- 
sive scale  were  in  force,  say,  with  an  exemption  of  $10,000, 
a  5  per  cent  tax  on  amounts  between  $10,000  and  $50,000, 
and  a  10  per  cent  tax  on  amounts  between  $50,000  and 
$100,000,  the  difference  between  considering  the  estate, 
and  each  individual  share  as  the  base,  becomes  at  once 
noticeable.  Only  a  few  attempts  have  been  made  to  use 
the  size  of  the  estate  as  the  base  for  the  tax,  and  these 
have  either  been  refused  by  the  courts  or  given  up  for 
other  reasons. 

Evasion  and  Injustice. — The  gradual  increase  in  the  use 
of  the  inheritance  tax,  together  with  an  increase  in  the 
rates,  has  increased  the  likelihood  of  evasion,  and  has 
magnified  any  injustices  which  exist  in  the  system.  With 
the  increase  in  rates,  the  temptation  to  dispose  of  prop- 


INHERITANCE  TAXES  325 

erty  before  death  increases.  Cognizance  has  been  taken 
of  this,  and  in  many  cases  "  transfers  of  property  in  con- 
templation of  death"  have  been  made  subject  to  the  tax. 
The  courts  have  rather  consistently  held  that  the  burden 
of  proof  in  such  cases  rested  with  the  state,  which  resulted 
in  few  proofs  being  attempted.  A  more  recent  develop- 
ment has  been  legislation  to  the  effect  that  all  transfers  of 
property  within  a  certain  period  previous  to  death  shall 
be  considered  as  transferred  in  contemplation  of  death, 
and  hence  subject  to  the  tax.  In  Wisconsin  the  period  is 
six  years.  Recognition  is  sometimes  made  of  the  fact 
that  some  successions  may  be  made  more  rapidly  than 
others.  If  a  son  should  die,  for  instance,  and  leave  an 
estate  to  his  father,  it  is  likely  a  second  bequest  will 
follow  much  sooner  than  if  the  transfer  had  been  in  the 
opposite  direction.  Laws  sometimes  provide  that  a  sec- 
ond tax  will  not  be  exacted  if  one  has  been  paid  within  a 
certain  number  of  years. 

Taxation  of  Gifts. — The  attempt  to  tax  gifts  in  contem- 
plation of  death  has  led  to  much  litigation  and  injustice. 
The  length  of  tune  one  lives  after  he  disposes  of  property 
has  little  to  do  with  the  ability  of  the  recipient  to  meet 
the  tax  burdens.  Neither  is  there  any  assurance  that  one 
year  or  ten  years  will  measure  the  time  within  which 
death  will  be  contemplated.  Any  length  of  time  decided 
upon  must  be  arbitrary,  and  much  injustice  will  result. 

But  why  attempt  any  such  measurement?  Since  in- 
heritance taxes  are  justified  on  the  basis  of  ability  to  pay, 
there  is  no  good  reason  for  treating  a  gift,  whenever  made, 
any  differently  from  a  transfer  of  property  after  death. 
The  case  is  strong,  indeed,  for  the  levy  of  a  tax  upon  gifts 
whenever  made  at  the  same  rate  as  one  levied  upon  the 
transfer  of  property  at  death.  The  time  element  has 
little  to  do  with  the  situation.  A  gift  at  one  time  is  just 
as  much  a  fortuitous  income  as  at  some  other  time;  it 
may  be  just  as  much  unexpected  at  one  time  as  another; 
just  as  much  taxpaying  ability  exists  in  a  gift  before 


326  OUTLINES  OF  PUBLIC  FINANCE 

death  as  in  the  receipt  of  property  after  death;  as  in  the 
case  of  an  inheritance,  an  ability  has  been  created  which 
will  never  again  be  so  great.  A  tax  upon  gifts,  therefore, 
conforms  closely  to  the  ability  to  pay  principle. 

The  taxation  of  all  gifts  would  simplify  present  inheri- 
tance tax  administration,  and  would  be  conducive  to  a 
greater  degree  of  justice  than  where  an  attempt  is  made 
to  tax  only  those  gifts  made  in  contemplation  of  death. 
The  same  rates  should  be  placed  upon  gifts  as  are  levied 
upon  inheritances,  with  the  same  exemptions  as  well  as 
the  same  differences  for  near  and  distant  relatives  or 
strangers  in  blood. 

170.  Conflicting  Jurisdictions  Create  Serious  Problems. 
— The  existence  of  a  number  of  political  units,  whose 
interests  are  not  separate  and  distinct,  and  the  attempt 
of  each  to  adopt  a  form  of  taxation  designed  for  its  own 
needs,  with  little  consideration  for  those  of  its  political 
neighbors,  has  caused  many  serious  problems  to  those 
seeking  to  secure  justice  in  taxation.  This  situation  has 
enhanced  the  problem  of  securing  just  inheritance  taxa- 
tion, and  has  manifested  itself  in  particular  in  the  United 
States,  with  its  many  political  divisions.  A  few  of  the 
states  do  not  use  the  tax,  while  in  the  others  it  varies  from 
a  half-hearted  attempt  to  secure  a  little  revenue  from  col- 
lateral heirs  to  highly  progressive  rates  upon  all  estates. 
rfThe  laws  not  only  lack  uniformity  in  respect  to  rates  and 
progression,  but  in  the  bases  upon  which  the  tax  is  levied. 
The  result  is  that  some  estates  are  subject  to  more  than 
one  tax,  while  others  escape  the  tax  that  they  are  really 
expected  to  pay. 

Domicile  of  Decedent. — To  a  large  extent  the  inheritance 
tax  is  placed  at  the  domicile  of  the  decedent.  Since  the 
burden  varies  to  such  an  extent  in  the  different  states,  it 
becomes  profitable,  in  the  case  of  large  estates,  to  change 
the  place  of  residence  to  a  state  with  lenient  considera- 
tions toward  bequests,  although  no  change  be  made  in 
the  business,  or  property,  or  economic  interest.  Because 


INHERITANCE  TAXES  327 

of  the  increasing  adoption  of  the  income  tax  as  a  source 
of  state  revenue,  the  selection  of  a  suitable  domicile  will 
assume  an  aspect  of  even  greater  importance.  A  state 
which  is  lenient  in  the  matter  of  income  taxes,  as  well  as 
in  the  levy  of  inheritance  taxes,  is  bidding  to  become  a 
popular  place  of  residence  for  men  of  wealth.  This  is 
noticeable  in  the  Eastern  states,  where  the  states  are 
small  and  where  there  is  a  large  amount  of  wealth.  The 
possibility  of  this  result,  no  doubt,  has  had  much  to  do 
with  keeping  a  number  of  states  from  making  a  greater 
use  of  inheritance  taxes.  They  have  feared  to  increase 
the  severity  of  the  burden  beyond  that  of  neighboring 
states  lest  the  wealthy  citizens  change  their  place  of 
domicile. 

Situs  of  Property. — The  state  frequently  imposes  an  in- 
heritance tax  upon  the  basis  of  situs  of  the  property,  and 
upon  the  personal  property  of  individuals  living  in  the 
state.  Many  states  go  farther,  and  impose  the  tax  upon 
shares  in  domestic  corporations,  while  many  go  still 
farther  and  place  the  tax  upon  shares  of  corporations 
within  the  state  owned  by  a  nonresident.  Some  tax  the 
shares  at  their  physical  location;  for  example,  shares  of 
stock  deposited  in  a  bank  for  safe  keeping,  no  matter 
where  the  residence  of  the  owner.  Some  have  even  used 
indebtedness  as  a  base — that  is,  bonds  would  be  taxed  in 
the  state  from  which  issued,  no  matter  wrhere  the  owner 
lived  or  died. 

The  resulting  complexity  of  the  use  of  these  diverse 
attempts  can  easily  be  imagined.  Two,  three,  four,  and 
even  five  taxes  may  be  collected  from  one  estate — the  in- 
justice of  which  no  one  will  deny.  Suppose  an  individual 
dies  in  state  A,  who  was  a  citizen  of  state  B,  owned  $100,- 
000  worth  of  bonds  of  a  corporation  chartered  hi  state  C, 
the  actual  property  of  which  was  in  state  D,  while  the 
bonds  were  in  a  safety  vault  in  state  E.  The  inheritance 
tax  law  of  A  taxes  the  property  of  every  decedent  of  the 
state,  B  that  of  every  citizen,  C  the  bonds  of  corporations 


328  OUTLINES  OF  PUBLIC  FINANCE 

chartered  within  the  state,  D  the  property  where  located, 
and  E  the  situs  of  the  bonds.  In  this  case  the  bonds 
would  bear  the  tax  rate  in  force  in  each  of  the  five  states. 
This,  of  course,  would  be  an  extreme  case,  yet  examples 
of  double  and  triple  taxes  upon  estates  are  not  uncommon. 

Stability  and  Uniformity  Desirable. — This  chaotic  con- 
dition is  far  from  satisfactory.  The  expense  and  delay  in 
settling  estates  is  often  increased  many  fold,  while  the 
rulings  of  the  courts  have  become  so  numerous  and  so 
hair-splitting  as  to  add  greatly  to  the  complexity  of  the 
situation.  The  instability  of  the  various  laws,  moreover, 
is  not  conducive  to  the  comfort  of  investors.  Nineteen 
states  modified  their  laws  in  1919.  The  law  in  New  York 
State  has  been  amended  more  than  forty  times  since  its 
adoption  in  1885.  One  never  knows  what  may  be  the 
condition  a  few  years  hence.  While  no  single  state  im- 
poses an  excessive  burden  upon  estates,  yet  the  piling  up 
of  double  and  multiple  taxes  may  develop  an  excessive 
burden  and  even  necessitate  a  dismemberment  of  the 
property  in  order  to  be  able  to  pay  the  tax. 

While  a  better  situation  is  unquestionably  desirable,  a 
remedy  seems  far  to  seek.  Some  uniform  system  which 
would  eliminate  double  taxation  would  be  the  logical 
solution.  To  secure  cooperation  among  the  states — each 
with  its  own  selfish  interests  paramount-— to  the  end  of  a 
uniform  method  of  inheritance  taxation  is  too  much  even 
to  hope  for.  The  recent  reentrance  of  the  Federal  gov- 
ernment into  this  field  of  revenue,  however,  presents  a 
possible  solution,  improbable  as  it  may  seem.  Uniformity 
could  be  secured  by  the  various  states  giving  up  their 
diversified  systems,  and  allowing  the  Federal  government 
to  occupy  the  field  with  a  uniform  law.  The  machinery 
of  transfer  located  in  the  states  would,  of  course,  have  to 
be  used,  and  the  Federal  government  could  distribute 
back  a  part  of  the  revenue  collected.  Rates,  in  this  case, 
could  be  high  enough  to  make  the  system  a  powerful 
source  of  revenue.  Practically  unsolvable  problems  arise, 


INHERITANCE  TAXES  329 

however,  in  securing  the  consent  of  the  states,  and  in 
finding  some  practical  basis  for  redistributing  the  amount 
collected  back  to  them. 

Advantages  of  Tax. — In  spite  of  the  difficulties,  however, 
the  inheritance  tax  is  destined  to  play  a  role  of  much 
greater  importance  in  the  fiscal  systems  of  our  states,  and 
probably  in  that  of  the  Federal  government,  than  it  ever 
has  in  the  past.  Its  outstanding  advantages  cannot  but 
be  favorable  to  its  further  extension.  The  opportunity 
for  fraud  and  evasion  is  minimized,  since  the  machinery 
of  the  courts  must  be  used  in  making  the  transfer  of 
property.  The  receipts  come  in  throughout  the  year, 
with  few  payments  compared  with  the  amount  of  revenue 
received.  For  large  political  units,  moreover,  the  yield  is 
remarkably  uniform.  It  is  a  tax  well  suited  to  provide 
an  elastic  feature — a  rise  in  the  rates  will  not  cut  off  the 
source  of  the  tax  by  causing  fewer  deaths,  although  it 
may  lead  to  greater  evasion.  The  incidence  of  the  tax, 
moreover,  is  certain — a  definite  amount  is  taken  from  the 
estate  before  it  reaches  the  recipient — the  burden  falls 
upon  him,  and  he  cannot  shift  it.  It  is  a  tax  which 
conforms  well  to  Adam  Smith's  four  canons:  it  falls 
according  to  ability,  is  certain,  is  paid  at  the  time 
most  convenient,  and  should  be  an  inexpensive  tax  to 
collect. 

171.  The  Federal  Government  Has  Not  Regularly  Used 
Inheritance  Taxes. — The  inheritance  tax  has  found  a  place 
in  the  fiscal  system  of  the  Federal  government  at  several 
different  times.  Generally  this  has  been  in  times  of  emer- 
gency, when  the  primary  object  was  to  secure  more  rev- 
enue. As  early  as  1794  recommendations  were  made  for 
a  tax  upon  the  succession  of  property  at  death.  The  first 
law  which  placed  a  tax  of  this  nature  was  passed  in  1797, 
and  remained  in  force  until  1802.  Direct  heirs  were 
exempt  from  the  tax,  while  others  were  taxed  only  on  the 
excess  above  $50.  The  rate  was  twenty-five  cents  when 
the  amount  was  not  more  than  $100;  from  $100  to  $500 


330  OUTLINES  OF  PUBLIC  FINANCE 

it  was  fifty  cents;  the  tax  on  $500  was  one  dollar,  with 
an  additional  dollar  for  each  increase  of  $500.  While  this 
was  perhaps  more  the  nature  of  a  fee,  we  find,  early  in  the 
levy  of  a  rate  upon  legacies,  the  recognition  of  the  prin- 
ciples of  progressive  rates,  and  a  differentiation  on  the 
basis  of  relationship. 

Tax  of  1862. — Other  recommendations  were  made  after 
the  repeal  of  this  law,  but  Congress  enacted  no  similar 
legislation  until  1862.  This  levy  was  of  two  kinds — one 
known  as  a  legacy  tax,  and  the  other  as  a  succession  tax. 
The  rates  were  progressive,  ranging  from  1  per  cent  to 
6  per  cent,  with  an  exemption  of  $1,000  allowed.  They 
were  repealed  in  1870,  the  revenue  having  increased  from 
about  a  half  million  dollars  the  first  year  of  use  to  nearly 
three  million  dollars  the  last  year.  This  last  represented 
a  little  less  than  2  per  cent  of  the  total  internal  revenue 
receipts. 

Tax  of  1898. — Taxes  upon  inheritances  and  gifts  were 
included  in  the  ill-fated  income  tax  law  of  1894.  In  1898, 
however,  they  were  again  introduced  as  a  means  for 
securing  additional  revenue.  The  law,  which  was  re- 
pealed in  1902,  differentiated  between  degrees  of  rela- 
tionship, and  used  progressive  rates  which  went  as  high 
as  15  per  cent  for  collateral  heirs.  The  act  was  productive 
of  revenue;  in  1902-03  it  supplied  more  than  2  per  cent 
of  the  internal  revenue  receipts.  As  an  aid  to  secure 
revenue  to  finance  the  Great  War,  inheritance  taxes  were 
again  called  into  use.  These  will  be  discussed  in  the 
chapter  dealing  with  emergency  financiering. 

There  is  much  disagreement  as  to  the  use  the  Federal 
government  should  make  of  the  inheritance  tax.  Many 
authorities  hold  that  this  field  of  revenue  should  be  left 
entirely  to  the  exploitation  of  the  states,  the  expenditures 
of  which  are  continually  on  the  increase,  while  their 
sources  of  income  are  more  or  less  limited.  On  the  other 
hand,  the  needs  of  the  Federal  government  have  increased 
greatly,  and  these  must  be  met  from  revenue.  The  larger 


INHERITANCE  TAXES  331 

the  percentage  that  can  be  collected  from  inheritance 
taxes,  the  less  there  will  be  to  be  collected  from  some 
more  burdensome  source.  There  is  no  good  reason  why 
both  the  Federal  government  and  states  should  not  use 
the  tax,  nor  why  they  should  not  cooperate  in  making 
the  tax  uniform  and  just. 

172.  Inheritance  Taxes  Are  Important  in  the  Fiscal  Sys- 
tems of  Some  States. — Ever  since  Pennsylvania  adopted 
the  principle  of  the  inheritance  tax  in  1826,  it  has  been 
embodied  in  the  fiscal  system  of  one  or  more  of  the 
American  states.  Its  importance  has  greatly  increased, 
however,  during  the  last  twenty-five  years,  until  in  1920 
forty-five  of  the  forty-eight  states  were  using  some  form 
of  the  tax.  As  the  needs  for  revenue  become  more 
pressing,  as  the  legislators  become  educated  to  the 
merits  of  the  tax,  and  as  more  cooperation  can  be  de- 
veloped among  different  states,  a  much  more  thorough 
use  of  this  form  of  taxes  can  be  expected  as  a  source  of 
state  revenues. 

Examples  of  State  Taxes. — The  inheritance  tax  laws  in 
our  states  have  taken  on  nearly  every  conceivable  form. 
The  early  Pennsylvania  tax  was  2J/£  per  cent  placed  upon 
the  transfer  of  property  to  collateral  heirs.  An  exemption 
of  $250  was  allowed.  Two  years  later  Louisiana  placed 
a  tax  on  property  going  to  foreign  heirs.  Gradually  other 
states  were  added  to  the  list,  and  as  the  years  went  by 
amendment  was  placed  upon  amendment,  the  courts  be- 
came more  favorable,  until  the  system  as  it  is  found  at 
present  resulted.  Space  does  not  permit  a  survey  of  the 
laws  found  in  the  various  states,  nor,  because  of  the 
changes  which  are  imminent  in  many  states,  would  any 
survey,  which  might  be  made  now,  be  of  any  particular 
value  in  a  few  years.  The  outstanding  features  of  only  a 
few  laws  will  be  noted. 

The  state  of  New  York,  through  the  amendment 
adopted  in  1911,  is  considered  to  have  one  of  the  most 
model  inheritance  tax  laws.  An  exemption  of  $5,000  is 


332  OUTLINES  OF  PUBLIC  FINANCE 

made  to  direct  heirs,  and  $1,000  to  collateral  heirs.  The 
rates  are  as  follows: 

Above  exemption,  up  to  $    50,000,  1%  for  direct,  5%  for  collateral 
From  $  50,000         "    "      250,000,  2%    "       "        6%    " 
250,000         "    "   1,000,000,  3%    "        "       7%    " 
All  above  $1,000,000,  4%    "        "       8%    " 

The  law  also  seeks  to  avoid  double  and  multiple  taxation, 
such  as  was  described  above.  The  estates  of  residents  are 
taxed  upon  tangible  property  within  the  state  and  intangi- 
ble property  wherever  it  may  be  situated.  No  tax  is 
placed  upon  the  intangible  property  in  the  estates  of  non- 
residents, and  only  their  tangible  property  within  the  state 
is  taxed.  The  intangible  property  includes  such  items  as 
money,  bank  deposits,  shares  of  stock,  bonds,  notes, 
credits,  etc.  Bequests  to  religious,  educational,  and  char- 
itable institutions,  whether  within  or  without  the  state, 
are  exempt  from  the  tax.  Recent  legislators,  however, 
have  shown  some  disposition  to  recede  from  this  tolerant 
attitude,  and  some  of  the  former  exemptions  have  been 
removed,  as,  for  example,  the  shares  of  stock  of  domestic 
corporations  and  New  York  national  banks  in  the  hands 
of  nonresident  decedents. 

Some  of  the  other  states  have  modified  their  laws  so 
as  to  conform  more  nearly  to  justice.  No  doubt  the  un- 
selfish influence  of  New  York  has  had  its  effect.  Califor- 
nia was  one  of  the  first  states  to  follow  the  example,  yet 
went  much  farther  in  the  steepness  of  rates.  The  rate  on 
bequests  to  direct  heirs  is  progressive  from  1  to  5  per 
cent,  while  to  collateral  heirs  it  ranges  from  2  to  25  per 
cent.  The  fact  that  most  states  have  introduced  the  tax 
by  placing  it  first  upon  collateral  inheritances  and  then 
gradually  extending  it  to  include  direct  inheritances,  is 
still  evident.  A  few  years  ago  many  states  used  the  col- 
lateral tax,  with  no  tax  upon  the  direct  transfers  of  prop- 
erty, and  this  is  still  true  in  a  few  cases.  Gradually,  how- 
ever, direct  inheritances  are  being  included  in  the  tax, 


INHERITANCE  TAXES  333 

although  with  higher  exemptions  and  lower  rates  than  for 
collateral  inheritances,  until  it  is  likely  that  the  time  is 
not  far  distant  when  direct  inheritance  taxes  will  be  used 
in  all  the  states  where  the  tax  on  collateral  transfers  is 
now  found. 

The  abundance  of  revenue  from  other  sources  has  made 
the  American  states  somewhat  slow  in  seizing  upon  the 
inheritance  tax  as  a  part  of  their  fiscal  systems.  The  tax 
is  one,  however,  that  appeals  to  public  sentiment,  and 
without  doubt  it  has  come  to  stay.  As  years  go  on  it  will 
be  found  to  occupy  a  place  of  increasing  Importance  in 
our  sources  of  revenue. 

173.  The  Inheritance  Tax  Is  Used  Extensively  Abroad. 
— A  study  of  the  use  of  the  inheritance  tax  in  foreign 
countries  reveals  how  dilatory  America  has  been  in  seizing 
upon  the  principle.  The  tax  has  been  extensively  used  in 
Switzerland,  Spain,  Sweden,  Holland,  Italy,  Germany, 
Greece,  France,  Russia,  England,  Ireland,  Canada,  Aus- 
tralia, Belgium,  Portugal,  Austria,  and  many  other  coun- 
tries. Highly  progressive  rates  are  found  in  many  of  these 
countries,  particularly  in  France,  England,  Australia,  and 
Switzerland.  The  tax  seems  to  have  had  its  broadest  de- 
velopment in  the  more  democratic  countries. 

To  go  into  the  study  of  the  inheritance  tax  in  these 
foreign  countries  would  take  us  too  far  afield.  A  brief 
glance  at  a  few  of  them,  however,  will  be  worth  while  for 
the  purpose  of  comparing  them  with  the  taxes  used  in  the 
United  States.  England  has  used  the  tax  since  1780. 
Amendments  have  been  made  until  the  tax  takes  three 
forms:  one  on  the  general  estate,  one  on  the  personal 
property,  and  one  on  real  estate.  The  amounts  are  grad- 
uated and  taxed  at  a  progressive  rate,  ranging  from  1  to 
23  per  cent.  In  France  the  maximum  rate  imposed  upon 
collateral  inheritances  is  over  20  per  cent,  while  the  maxi- 
mum rate  upon  direct  estates  is  about  5  per  cent.  In 
Italy  and  Germany  the  rates  have  been  somewhat  higher. 
The  Australasian  and  Canadian  provinces  have  followed 


334  OUTLINES  OF  PUBLIC  FINANCE 

the  lead  of  the  Mother  country,  and  are  making  extensive 
use  of  the  tax  with  steeply  progressive  rates. 

Since  the  inheritance  tax  so  admirably  supplements  in- 
come taxes,  and  since  each  has  become  so  deservedly 
popular,  it  is  not  too  much  to  predict  that  each  will  hold 
a  place  of  vital  importance  in  the  revenue  systems,  not 
only  of  Federal  governments,  but  also  of  the  provinces 
and  states.  Because  of  its  backwardness  in  the  past  the 
United  States  may  be  looked  upon  to  furnish  examples  of 
the  most  rapid  extension  of  the  use  of  inheritance  taxes 
during  the  next  few  decades. 

ADDITIONAL  READING 

Max  West,  Inheritance  Tax. 
Blakemore  and  Bancroft,  Inheritance  Taxes. 
Seligman,  Essays  in  Taxation,  chap.  v. 
Proceedings  of  the  National  Tax  Association,  1913,  pp. 
283-320;  1919,  pp.  273-293;  1920,  pp.  78-95. 


CHAPTER  XV 

TAXATION   OF   CORPORATIONS 

174.  Different  Causes  Have  Placed  Special  Taxes  on 
Corporations. — The  introduction  of  the  corporate  form  of 
industry  was  heralded  with  delight,  and  corporations  were 
looked  upon  and  treated  as  a  class  of  public  benefactors. 
Valuable  concessions,  in  the  form  of  bounties  and  exemp- 
tions, were  granted  by  municipal,  state,  and  Federal  legis- 
lative bodies  to  foster  the  development  of  this  form  of 
industry.  These  concessions  have  taken  various  familiar 
forms.  Protective  tariffs,  for  example,  have  been  granted 
to  the  benefit  of  particular  industries,  while  the  financial 
assistance  and  large  land  grants,  by  which  the  railroad 
companies  were  subsidized,  are  familiar  to  all.  Aside  from 
this,  many  exclusive  and  irrevocable  franchises  were 
granted,  while  immunities  were  often  extended  from  exist- 
ing legislation.  This  was  particularly  true  of  tax  laws  in 
their  application  to  public  utility  companies.  Provision 
was  frequently  made  that  no  taxes  would  be  collected 
until  the  company  had  been  in  operation  a  certain  length 
of  time,  nor  even  then,  unless  the  net  income  were  a  cer- 
tain per  cent  of  the  capital  stock.  Under  such  favorable 
circumstances  it  is  self-evident  why  these  organizations 
had  a  phenomenal  growth,  and  why  they  became  powerful 
institutions. 

Hostile  Attitude  of  Public. — With  the  growth  of  their  in- 
dustrial and  political  strength,  corporations  began  to  as- 
sume the  attitude  that  the  public  existed  for  their  benefit 
rather  than  that  they  were  brought  into  existence  for  the 

benefit  of  the  public.     With  the  unfair  practices  which 
22 


336  OUTLINES  OF  PUBLIC  FINANCE 

arose,  and  the  unreasonable  demands  which  were  pre- 
sented, the  public  soon  became  convinced  that  special 
immunities  should  no  longer  be  granted.  It  was  awaken- 
ing to  the  fact  that  it  was  being  exploited  by  companies 
that  had  been  granted  long  time  or  perpetual  franchises, 
with  no  reservations  to  protect  the  niter ests  of  the  public. 
A  franchise,  it  began  to  appear,  no  longer  primarily  con- 
veyed the  idea  of  service  to  the  public,  but  appeared  to 
grant  the  right  to  exploit  the  public.  When  the  people 
began  to  realize  the  value  of  these  rights  which  they  had 
so  lavishly  bestowed,  and  when  they  turned  to  attempt 
to  correct  the  evil  which  they  had  brought  upon  them- 
selves, no  weapon  seemed  so  readily  available  as  increased 
taxation.  The  first  step  was  to  abolish  special  favors  and 
immunities  which  had  been  granted,  and  then  the  attempt 
was  made  to  apply  the  existing  tax  laws  to  corporate 
property. 

Use  of  Existing  Taxes. — Practically  the  only  tax  in 
existence  at  this  time  was,  of  course,  the  general  property 
tax,  and  the  attempt  was  made  to  reach  the  value  of  cor- 
porate property  through  its  channels.  The  tax  laws  of 
most  states  made  the  property  of  all  persons  in  the  state 
subject  to  assessment  and  taxation,  and  corporations  fre- 
quently attempted  to  escape  on  the  ground  that  they 
were  not  persons.  The  courts,  however,  uniformly  took 
the  opposite  view,  and  eliminated  this  difficulty. 

The  use  of  the  general  property  tax,  when  applied  to 
corporations,  was  even  less  satisfactory  than  were  the 
results  in  reaching  other  kinds  of  property.  The  burden 
of  the  assessment  was  placed  upon  the  local  assessor,  who 
was  either  incapable  of  making  proper  valuations,  or  else 
unable  to  do  so.  The  inequalities  of  assessment  have  been 
outstanding.  Assessors  in  some  districts  have  either  had 
different  bases  of  valuation,  have  possessed  better  facili- 
ties for  locating  values,  or  have  been  more  or  less  deter- 
mined to  secure  a  full  valuation  than  assessors  of  other 
districts.  The  stocks  and  bonds  of  corporations,  which 


TAXATION  OF  CORPORATIONS  337 

were  supposed  to  be  assessed,  generally  escaped.  The  ac- 
curate valuation  of  a  large  factory  with  its  machinery, 
raw  materials,  goods  in  the  process  of  making,  and  stock 
of  finished  products,  is  beyond  the  possibility  of  accurate 
assessment  by  the  average  local  assessor.  Particular  dis- 
tricts, moreover,  have  frequently  offered  freedom  from 
heavy  tax  burdens,  as  a  special  inducement  for  corpora- 
tions to  locate  in  their  midst. 

Outstanding  Inequalities. — These  inequalities  are  es- 
pecially marked  where  the  property  of  a  corporation  is 
located  in  different  assessment  districts,  as  is  the  property 
of  railroads.  Assessors  have  no  satisfactory  way  of  placing 
a  value  upon  such  part  of  the  road  as  lies  within  their 
jurisdiction,  and  yet  some  valuation  must  be  made.  Ex- 
amples are  numerous  in  which  the  assessed  valuation  per 
mile  in  contiguous  districts  has  varied  many  thousands 
of  dollars.  Some  districts  have  sought  to  pay  the  school 
expenses  from  such  taxes;  others,  the  maintenance  of 
highways,  while  others  have  been  negligent  in  attempting 
to  realize  any  return  from  corporations. 

The  stipulation  has  usually  been  made  that  the  capital 
stock  is  to  be  taxed  at  the  location  of  the  principal  office, 
which  one  would  naturally  suppose  would  be  located 
where  the  majority  of  the  business  is  to  be  found.  Cor- 
porations, however,  soon  discovered  the  advantage  of 
stipulating  that  the  principal  office  of  the  company  be 
in  some  out-of-the-way  district,  where  the  taxes  were  low, 
or  where  the  assessors  had  no  idea  that  a  corporation  had 
its  principal  office  in  their  midst.  The  capital  stock  of 
some  corporations  was  consequently  burdened  with  taxes 
while  that  of  others  escaped. 

The  result  of  these  situations  was  that  corporations,  as 
a  whole,  were  so  unequally  and  inadequately  taxed  that 
the  public  began  to  demand  that  special  taxes  be  placed 
upon  them.  From  the  above  sketch  it  might  be  said  that 
this  demand  arose  from  three  causes:  the  rapid  growth  in 
extension  and  power  of  the  corporations,  the  change  ha 


338  OUTLINES  OF  PUBLIC  FINANCE 

the  attitude  of  the  public  toward  their  nature,  and  the  in- 
ability of  existing  methods  of  taxation  to  reach  corpo- 
rate values. 

175.  Special  Corporation  Taxes  Take  the  Form  of  Fran- 
chise Taxes. — Corporations  usually  have  not  been  re- 
lieved from  the  assessments  of  local  taxing  districts,  but 
the  demand  for  heavier  burdens  against  them  has  resulted 
in  the  imposition  of  additional  taxes,  usually  by  the  state, 
which  are  designated  as  franchise  taxes.  As  the  name 
indicates,  they  represent  an  exaction  for  some  special 
privilege,  which  a  corporation  is  supposed  to  possess. 
These  privileges  may  be  of  a  different  nature,  but  so  far 
as  concerns  the  levy  of  taxes,  three  classes  are  usually 
distinguished — the  franchise  to  become,  the  franchise  to  be, 
and  some  form  of  a  special  franchise  other  than  these  two. 

Kinds  of  Franchises. — A  franchise  to  become  a  corpora- 
tion is  a  comparatively  simple  concept.  It  is  the  right 
which  the  state  gives  to  an  organization  to  pose  and  act 
as  an  individual.  It  is  an  act  of  the  state,  done  once  and 
for  all,  but  which  has  a  value  to  the  organization.  A 
condition  of  much  greater  importance,  however,  is  the 
continuance  of  the  corporation  from  year  to  year,  and  the 
enjoyment  and  advantage  which  this  form  of  organiza- 
tion gives  over  the  individual  or  partnership.  It  can  be 
readily  seen  that  this  is  the  important  form  of  corporation 
franchise,  and  it  is  in  connection  with  the  taxation  of  this 
franchise  that  many  of  the  difficult  problems  have  arisen. 
Special  franchises  arise  when  some  outstanding  advan- 
tage is  granted  to  particular  corporations  that  are  not 
enjoyed  by  others.  The  best  example  of  this  form  of 
franchise  occurs  in  the  use  of  public  highways  and  streets 
by  such  public  utility  companies  as  telegraph  and  tele- 
phone companies,  water  and  lighting  companies,  and  street 
railways. 

The  Incorporation  Fee. — The  taxation  of  the  privilege 
to  become  a  corporation  is  comparatively  easy,  and  is 
usually  accomplished  through  the  collection  of  an  incor- 


TAXATION  OF  CORPORATIONS  339 

poration  fee.  No  uniformity  exists  in  the  various  states 
as  to  the  amount  of  this  fee.  Since  it  is  paid  only  once, 
however,  this  variation  has  little  to  do  in  determining 
the  location  of  corporations,  for  location  is  determined 
by  factors  of  greater  moment  than  the  size  of  the  incor- 
poration fee.  In  some  states  a  fixed  amount — for  exam- 
ple, twenty-five  dollars — is  exacted  from  every  corpora- 
tion for  profit  chartered  in  the  state.  A  more  general  plan 
is  to  levy  a  tax  which  varies  directly  with  the  amount  of 
capitalization,  after  a  fixed  minimum  fee  has  been  reached. 
The  amounts  exacted  under  this  incorporation  fee  have 
never  been  so  large  as  to  be  burdensome,  and  have  occa- 
sioned practically  no  difficulties.  Difficulties  have  arisen, 
however,  hi  assessing  the  other  franchises,  which  will  be 
given  a  more  extended  treatment. 

176.  Taxation  of  the  Franchise  to  Be  Presents  Serious 
Problems. — The  taxation  of  corporations  presents  difficul- 
ties in  addition  to  those  which  arise  in  the  taxation  of 
individuals.  One  of  the  first  situations  which  presents 
itself  is  that  an  artificial  individual  has  been  created 
which  can  own  property  and  conduct  business  in  which, 
however,  the  interest  of  natural  individuals  is  centered. 
While  the  corporation  is  a  separate  entity,  yet  it  is  one 
owned  by  the  stockholders,  and  if  a  part  of  the  capital  has 
been  raised  from  the  issue  of  bonds,  one  upon  which  a  hen 
is  held  by  the  bondholders.  When,  then,  these  three 
interests  are  found  in  conjunction,  the  problem  immedi- 
ately arises  as  to  where  the  tax  burden  should  be  placed. 
Should  it  be  placed  upon  the  corporation  alone,  upon  both 
the  corporation  and  the  stockholders,  upon  the  bond- 
holders as  well,  or  upon  all  three  classes  of  interests? 

Assessment  Difficulties. — Difficulties  continually  arise 
because  of  the  overlapping  of  political  jurisdictions.  One 
of  the  first  which  appears  is  the  inhibition  placed  upon 
the  states  from  interfering  with  interstate  commerce. 
This  has  made  particularly  difficult  the  taxation  of  public 
utilities,  the  lines  of  which  extend  into  different  states. 


340  OUTLINES  OF  PUBLIC  FINANCE 

Where  a  corporation  has  property  in  various  states,  or 
where  the  situs  of  the  property  and  the  residence  of  the 
stockholders  and  bondholders  may  be  in  different  juris- 
dictions, and  attempts  are  made  to  tax  the  three  forms, 
the  serious  problem  of  the  double  or  treble  taxation  of  the 
same  property  arises. 

Difficult  problems  are  found,  also,  within  each  state. 
In  some  states  the  constitution  contains  what  is  known  as 
the  uniform  tax  clause — that  is,  that  all  taxation  must  be 
uniform.  This  has  prevented  any  taxation  of  corpora- 
tions other  than  by  the  general  tax  system.  Again,  some 
states  have  been  fortunate  in  having  progressive  and  wide- 
awake officials,  while  other  states  have  been  burdened 
with  reactionaries.  This  causes  a  wide  difference  in  the 
tax  methods  used  in  the  different  states,  and  consequently 
introduces  the  condition  of  varying  tax  burdens  upon 
similar,  and  often  competing  establishments  in  the  vari- 
ous states. 

With  these  problems  and  difficulties,  as  well  as  many 
others,  existing  in  forty-eight  jurisdictions,  and  with  as 
many  sets  of  officials  offering  solutions,  it  is  obvious  that 
anything  but  uniformity  exists  in  the  method  of  taxing 
corporations.  Not  only  is  the  general  system  different, 
but  the  method  of  taxing  the  various  classes  of  corpora- 
tions differs.  A  wide  variation  also  exists  in  the  extent  to 
which  the  different  states  resort  to  corporation  taxes  for 
revenue.  Some  states  secure  practically  the  whole  amount 
of  the  revenue  for  the  budget  of  the  state  from  this  source, 
while  hi  others  the  return  is  insignificant.  It  is  impossible 
to  generalize  accurately  on  the  methods  used  in  taxing 
corporations,  and  it  is  undesirable,  in  a  book  of  this  nature, 
to  enter  into  the  details  of  the  various  methods  which  are 
in  use.  It  will  be  profitable,  however,  to  review  some  of 
the  more  widely  used  plans  for  reaching  corporate  values, 
and  to  note  some  of  the  problems  which  have  arisen. 

177.  Taxes  upon  Capital  Have  Been  Most  General.— 
In  attempting  to  impose  an  extra  tax  upon  corporations, 


TAXATION  OF  CORPORATIONS  341 

one  of  the  first  schemes  hit  upon  was  to  place  a  levy  of 
some  nature  upon  the  capital  stock.  This  continues  to  be 
in  use  more  than  any  other  single  plan,  and  is  found  in 
more  than  half  the  states.  Some  of  the  schemes  in  vogue 
are  exceedingly  complex,  while  others  attempt  no  more 
than  to  exact  a  small  percentage  each  year  on  the  amount 
of  capital  stock.  Since  the  state  of  New  York  is  consid- 
ered one  of  the  most  progressive  states  in  matters  of 
taxation,  an  outline  of  the  Annual  Franchise  Tax  used  in 
that  state  may  be  given  as  an  example  of  one  of  the  more 
detailed  methods  in  which  capital  stock  is  used  as  the 
basis  for  determining  taxable  values. 

Annual  Franchise  Tax  of  New  York. — The  annual  fran- 
chise tax,  which  was  first  adopted  in  1880,  and  took  prac- 
tically its  present  form  in  1906,  does  not  replace  the  local 
taxation  of  corporations,  so  that  the  inequalities  of  local 
assessment  still  remain.  Under  the  annual  franchise  tax 
corporations  which  are  subject  to  the  tax  are  required  to 
make  yearly  reports  to  the  comptroller,  stating  the  amount 
of  authorized  capital  stock,  the  amount  of  stock  paid  in, 
the  date  and  rate  of  each  dividend  declared,  the  entire 
amount  of  capital,  and  the  amount  of  capital  employed 
in  the  state.  The  tax  is  to  be  paid  in  advance,  and  is  to 
be  based  upon  the  amount  of  capital  stock  employed 
within  the  state  during  the  preceding  year.  The  capital 
stock  employed  within  the  state  is  that  proportion  of  the 
entire  capital  stock  that  the  assets  within  the  state  bear 
to  the  entire  assets. 

The  capital  stock  is  classified,  for  the  purpose  of  assess- 
ing the  tax,  as  follows:  (1)  If  dividends  have  amounted 
to  6  or  more  per  cent  upon  the  par  value  of  the  stock,  the 
tax  rate  is  one  fourth  of  a  mill  for  each  per  cent  of  divi- 
dends made  or  declared.  (2)  If  dividends  have  been  less 
than  6  per  cent  and  (a)  assets  do  not  exceed  liabilities,  ex- 
clusive of  capital  stock,  or  (b)  the  average  selling  price  of 
the  stock  during  the  year  has  been  below  par,  or  (c)  if 
no  dividend  was  declared,  then  the  "rate  of  tax  is  three 


342  OUTLINES  OF  PUBLIC  FINANCE 

fourths  of  a  mill.  (3)  If  dividends  have  been  less  than 
6  per  cent  and  (a)  assets  exceed  liabilities,  exclusive  of 
capital  stock,  by  an  amount  equal  to  or  greater  than  the 
par  value  of  the  stock,  or  (b)  if  the  average  selling  price 
of  the  stock  has  been  above  par,  the  tax  rate  is  one  and 
one  half  mills:  but  the  valuation  of  the  stock  shall  not  be 
less  than  (a)  par  value;  (b)  difference  between  assets  and 
liabilities,  exclusive  of  capital  stock;  (c)  average  selling 
price  of  the  stock  during  the  year.  (4)  If  a  part  of  the 
capital  stock  has  paid  more  than  6  per  cent  dividend, 
while  a  part  has  paid  no  dividend  or  less  than  6  per  cent, 
the  above  rules  are  to  be  applied  to  each  portion  of  the 
stock  as  if  it  existed  alone.  (5)  Corporations  not  assess- 
able under  the  above  rules  are  to  be  taxed  by  an  amount 
not  less  than  would  be  produced  by  an  assessment  of  (a) 
one  and  one  half  mills  on  the  actual  value  of  the  capital 
stock,  or  (b)  one  and  one  half  mills  on  the  average  selling 
price  during  the  year.1 

It  is  not  intended  that  the  reader  will  thoroughly  under- 
stand this  system,  nor  is  it  the  intention  of  the  author  to 
attempt  to  clarify  a  system  that  has  been  involved  in 
litigation  ever  since  its  adoption.  It  is  seen  that  the  basis 
for  the  tax  is  capital  stock,  while  the  rate  is  determined 
by  a  number  of  variable  factors — dividends,  market  price 
of  the  stock,  and  the  financial  condition  of  the  corpora- 
tion. The  difficulties  and  uncertainties  which  arise  from 
the  numerous  complexities  of  the  plan  neutralize,  to  a 
great  extent,  any  advantages  which  are  expected  to  come 
from  such  a  minute  classification. 

Massachusetts  Plan. — In  contrast  to  the  New  York  plan, 
one  may  be  cited  which  has  been  used  for  many  years, 
which  is  comparatively  simple,  and  yet  has  given  a  large 

1  Not  all  corporations  are  subject  to  the  annual  franchise  tax.  The 
exemptions  comprise  banks,  savings  banks,  insurance  companies,  trust 
companies,  manufacturing  and  laundering  companies,  mining  companies, 
and  agricultural  and  horticultural  associations.  Public  utility  companies 
are  also  exempt  from  this  law,  but  are  taxed  upon  the  basis  of  earnings 
and  dividends  by  a  system  almost  as  complex  as  the  annual  franchise  tax. 


TAXATION  OF  CORPORATIONS  343 

measure  of  satisfaction.  This  is  the  plan  of  taxing  the 
corporate  excess  which  is  used  in  Massachusetts.  It  is 
an  attempt  to  assess  the  real  intangible  value  of  the  cor- 
porate privilege.  This  intangible  value  is  arrived  at  by 
the  tax  commissioner  from  two  sets  of  data:  one  is  the 
assessed  value  of  the  plant  which  has  been  made  by  the 
local  assessor;  the  other  is  the  market  value  of  the  shares 
of  stock  which  is  obtained  from  detailed  reports  by  the 
corporation.  The  difference  between  this  local  valuation 
and  the  valuation  of  the  shares  of  stock  represents  the 
excess  value  which  can  be  attributed  to  the  form  of  or- 
ganization, and  is  taxed  at  the  general  tax  rate. 

Other  Methods  of  Taxation. — Various  other  methods 
have  been  used  in  other  states  for  reaching  the  capital 
stock.  In  some  cases  the  bonds  have  been  added  to  the 
capital  in  order  to  approach  more  nearly  the  true  value  of 
the  corporation.  Some  states  use  the  par  value  of  the 
shares  of  stock,  and  others  use  the  market  value  as  the 
taxable  value.  Either  method  is  objectionable,  and  many 
cases  have  arisen  where  neither  would  represent  the  ability 
to  meet  tax  payments.  Two  corporations  with  exactly 
the  same  income  may  follow  radically  different  policies, 
which  would  be  reflected  in  the  value  of  the  stocks.  One 
may  follow  the  policy  of  putting  the  earnings  back  into 
the  business  until  it  becomes  immensely  undercapitalized, 
yet  all  this  time  the  market  value  of  the  stock  has  been 
low  because  no  dividends,  or  only  small  ones,  were  paid. 
The  other  corporation  paid  large  dividends,  but  has  put 
nothing  back  into  the  business,  and  its  stock  would  be 
selling  much  higher  than  that  of  the  first  organization. 
That  the  use  of  capital  stock  as  a  measure  of  taxable 
value  has  not  been  satisfactory  is  evidenced  by  the  num- 
ber of  corporations  which  have  been  removed  from  such 
tax  laws,  and  by  the  number  of  other  plans  which  have 
been  used  in  taxing  them. 

178.  Public  Utilities  Frequently  Have  Been  Subject  to 
Special  Taxes. — The  attempt  to  reach  all  classes  of  cor- 


344  OUTLINES  OF  PUBLIC  FINANCE 

porations  by  the  same  methods  of  taxation  soon  caused 
dissatisfaction.  It  was  found  that  assessments  could  not 
all  be  made  in  the  same  manner,  that  much  inequality 
was  resulting,  and  that  much  potential  revenue  was  escap- 
ing. It  was,  furthermore,  being  driven  home  with  in- 
creasing evidence  that  the  general  laws  in  application  were 
not  securing  justice  between  the  public  and  certain  classes 
of  corporations.  It  has  gradually  developed,  therefore, 
that  some  of  these  classes  have  been  relieved  from  the 
application  of  the  general  corporation  tax  law,  and  are 
taxed  in  a  special  manner. 

An  outstanding  example  of  this  situation  is  the  taxing 
of  public  utility  companies.  More  difficulties  have  arisen 
in  seeking  a  satisfactory  scheme  for  taxing  this  class  of 
corporations,  perhaps,  than  for  any  other.  The  problems 
which  have  arisen,  and  the  methods  which  have  been 
used  to  reach  the  taxable  value  of  these  companies,  apply 
in  degree  to  all  classes  of  corporations.  A  discussion  of 
some  of  these  problems  and  methods,  then,  will  have  a 
greater  significance  than  that  of  its  application  to  cor- 
porations of  this  particular  nature. 

Problem  of  Valuation. — The  outstanding  problem,  in  the 
case  of  public  utility  taxation,  as  in  the  case  of  other  cor- 
porate taxation,  is  to  ascertain  the  proper  value  upon 
which  taxes  should  be  levied.  This  is  a  local  as  well  as 
a  state  problem,  for  generally  these  utilities  are  taxed 
locally,  even  though  special  state  laws  formulate  the 
methods  of  taxation  for  other  purposes.  This  problem  of 
local  valuation  is  often  somewhat  different  from  the  larger 
valuation  of  the  state,  because  of  the  limited  extent 
of  the  jurisdiction  of  local  officials.  Assessors  are  con- 
fronted with  placing  a  valuation  on  a  small  portion  of  a 
railroad,  pipe  line,  telegraph  or  telephone  company,  and 
the  difficulties  encountered  are  at  once  obvious.  Many 
schemes  have  been  tried,  and  many  attempts  have  been 
made  by  the  courts  to  aid  in  arriving  at  some  satisfactory 
solution  of  the  problem  of  local  assessments.  Methods 


TAXATION  OF  CORPORATIONS  345 

and  suggestions  have  included  such  bases  as  the  original 
cost  of  the  plant;  the  cost  of  reproducing  the  plant;  the 
cost  of  reproducing  the  service;  the  value  of  the  part  of 
a  plant  in  a  particular  district  as  a  proportionate  part  of 
the  whole;  and  the  value  of  the  plant  as  determined  from 
its  earnings.  A  detailed  discussion  of  each  of  these  proc- 
esses of  valuation,  with  its  inherent  difficulties,  would 
take  us  too  far  afield.  A  discussion  of  some  of  the  more 
general  methods  of  levying  taxes  upon  public  service 
corporations,  however,  will  be  useful.  These  either  involve 
earnings  or  some  form  of  valuation. 

179.  A  Tax  on  Gross  Earnings  Presents  Difficulties. — 
Extensive  use  has  been  made  of  earnings  as  a  tax  base  in 
an  attempt  to  get  away  from  the  difficulty  of  placing  a 
taxable  value  upon  public  utility  corporations.  To  make 
this  concrete,  the  state  of  New  York  may  again  be  called 
upon  to  furnish  an  illustration.  Railroads  are  required  to 
pay,  semiannually,  a  tax  of  five  tenths  of  1  per  cent  of  the 
gross  earnings  from  business  transacted  in  the  state.  All 
water,  gas,  heating,  lighting,  and  power  companies,  in 
addition  to  a  semiannual  five  tenths  of  1  per  cent  fran- 
chise tax  upon  gross  earnings,  must  pay  a  3  per  cent 
tax  on  dividends  declared  above  4  per  cent  on  the  capital 
employed.  Reports  are  required  which  show  capital,  earn- 
ings, and  dividends.  Elevated  roads,  and  surface  roads 
not  operated  by  steam,  must  pay  an  annual  tax  of  1  per 
cent  of  the  gross  earnings  secured  from  business  within 
the  state,  and  3  per  cent  of  the  dividends  declared  in 
excess  of  4  per  cent  on  the  capital  employed.  The  prin- 
cipal basis  in  this  system  of  taxes,  it  is  easily  detected,  is 
earnings — gross  earnings  directly,  and  net  earnings  as 
reflected  in  the  amount  of  dividends  declared.  Some 
states  make  even  a  more  extensive  use  of  gross  earnings 
as  a  base  for  taxes  than  does  New  York. 

Advantages  of  Gross  Earnings. — Some  practical  advan- 
tages in  the  use  of  gross  earnings  as  a  base  for  taxation  at 
once  appear.  Gross  earnings  is  a  very  much  more  definite 


346  OUTLINES  OF  PUBLIC  FINANCE 

concept  than  any  other  form  of  earnings.  With  the  ex- 
tensive adoption  of  standard  systems  of  accounting,  the 
determination  of  this  item  is  comparatively  easy.  All 
items  of  expense  must  be  taken  from  the  gross  receipts, 
a-nd  it  is  not  illogical  to  consider  taxes  an  item  of  expense 
along  with  rent,  interest,  and  wages.  The  discretionary 
power  of  officials  can  be  dispensed  with,  in  large  measure, 
since  there  is  little  chance  of  manipulating  the  gross  re- 
ceipts statement,  while  the  tax  can  be  computed  by  sim- 
ple mathematical  computation.  Expenses  of  assessment 
and  collection  are  likewise  reduced  to  a  minimum,  so  that 
the  tax  "  takes  out  and  keeps  out  of  the  pockets  of  the 
people  as  little  as  possible  over  and  above  what  it  brings 
into  the  treasury  of  the  state."  A  gross  earnings  tax  has, 
moreover,  a  close  conformity  to  the  American  idea  of  a 
j  ust  base  for  taxation — property.  The  tax  would  be  absent 
until  a  corporation  was  established  upon  an  operating  basis. 
It  would  fluctuate  with  business  conditions — increase  as 
business  prospered,  and  prove  a  smaller  burden  in  times 
of  depression.  It  would  eliminate  the  difficulty  of  at- 
tempting to  place  an  estimate  upon  all  the  intangible 
franchise  values  which  a  company  is  supposed  to  possess. 
Tax  Officials  Favor  Gross  Earnings  Tax. — Many  tax 
officials  have  recognized  these  advantages  and  are  using 
the  gross  earnings  tax,  or  are  strongly  urging  its  adoption. 
After  a  careful  investigation  and  consideration,  an  On- 
tario tax  commission  recommended  it  as  being  undoubt- 
edly the  best  method  for  taxing  railroads.  A  California 
tax  commission  pointed  out  that  the  plan  would  result  in 
a  closer  approximation  to  justice  than  any  other  system 
which  the  state  might  select.  The  burden  would  vary 
with  the  fund  out  of  which  it  was  to  be  paid.  In  questions 
of  taxation,  practical  considerations  naturally  outweighed 
theoretical  ones,  and  this  tax  evidently  possessed  practi- 
cal advantages.  A  Minnesota  commission  pointed  out 
that  the  greatest  advantage  was  the  elimination  of  the 
necessity  for  valuing  the  complicated  and  peculiar  prop- 


TAXATION  OF  CORPORATIONS  347 

erties  of  the  corporation,  which  had  formerly  been  inac- 
curate and  but  crude  guesswork.  Many  other  testimo- 
nials could  be  presented,  but,  as  illustrative  of  their  gen- 
eral nature,  a  brief  quotation  from  a  Connecticut  report 
will  not  be  out  of  place.  It  said: 

The  tax  on  gross  earnings  avoids  all  the  difficulties  inherent  in  the 
tax  on  net  earnings.  No  corporation  can  do  business  without  having 
accounts  which  will  at  least  show  the  amount  of  its  gross  earnings. 
Gross  earnings  are  a  definite  fact,  ascertained  by  a  glance  at  the  ac- 
counts, and  incapable  of  argument  or  difference  of  opinion.  The  tax 
on  gross  earnings  can  be  evaded  only  by  perjury  of  the  most  obvious 
sort,  and  is  capable  of  easy  detection.  The  gross  earnings  tax,  there- 
fore, has  the  greatest  advantage  of  simplicity,  certainty,  and  ease  of 
administration.  This  is  an  advantage  both  to  the  corporation  and  to 
the  state.  The  amount  of  the  tax  on  gross  earnings  fluctuates  with 
the  prosperity  or  adversity  of  the  business,  and  is,  therefore,  just  to 
all  parties  concerned.  Moreover,  it  enters  each  year  into  the  accounts 
in  a  definite  ratio,  and  can  thus  be  counted  on  in  advance. 

A  serious  question  remains  to  be  answered.  Will  not  the  tax  on 
gross  earnings  be  distinctly  unfair  on  account  of  the  great  diversity 
between  different  corporations  in  their  ratios  of  expense  to  earnings? 
The  answer  is  that  such  injustice  is  to  be  avoided  by  classifying  cor- 
porations according  to  the  prevailing  ratio  of  net  earnings  to  gross, 
and  imposing  different  ratios  upon  the  gross  earnings  of  the  different 
classes  of  corporations. 

Investigation  shows,  for  instance,  that  the  ratio  of  net  earnings  to 
gross  is  fairly  uniform  for  the  railroads  of  the  country.  In  the  same 
way  there  is  a  general  prevailing  ratio  of  net  earnings  to  gross  for 
telephone  companies,  for  express  companies,  etc.  Having  determined 
what  this  prevailing  ratio  is  for  each  class  of  corporations,  we  are 
enabled  to  fix  ratios  for  each  class  which  will  make  the  tax  on  gross 
earnings  just  to  all.  It  is  true  that  absolute  justice  as  between  individ- 
ual corporations  of  the  same  class  is  not  obtained.  The  resulting  in- 
justice, however,  is  not  great.  .  .  .  Some  inequality  is  unavoidable,  but 
the  inequality  thus  resulting  is  distinctly  less  than  can  be  easily  shown 
to  result  from  any  of  the  other  schemes  of  taxation  which  are  before 
us.  No  tax  system  can  be  absolutely  perfect,  and  it  is  not  a  valid 
objection  against  a  proposed  scheme  to  point  out  a  defect  which  is 
present  in  even  greater  degree  in  each  of  the  other  possible  alternative 


1  Report  of  the  Special  Commission  on  Taxation  of  Corporations,  State 
of  Connecticut,  1913. 


348  OUTLINES  OF  PUBLIC  FINANCE 

Objections  to  Gross  Earnings. — In  spite  of  this  wide  ad- 
vocacy, and  its  apparent  success  in  many  instances,  the 
gross  earnings  tax  presents  serious  difficulties.  Gross  re- 
ceipts do  not  represent  earning  capacity,  and  it  is  earning 
capacity  that  makes  a  concern  valuable  and  able  to  pay 
taxes.  It  is  what  is  left  after  expenses  are  paid  that  spells 
success  or  failure.  The  gross  receipts  of  two  street  railway 
concerns,  for  example,  might  be  the  same,  while  the  net 
returns  might  be  such  as  to  make  one  a  success  and  the 
other  a  failure.  The  one  might  be  operating  under  aus- 
picious circumstances — short  lines,  heavy  traffic,  level 
streets,  etc.,  while  the  operation  of  the  other  might  have 
the  opposite  conditions. 

Similar  conditions  are  found  in  varying  degrees  in  all 
classes  of  corporations,  and  it  is  too  much  to  expect  that 
any  system  of  classification  can  take  them  properly  into 
account.  The  experiences  of  Michigan  and  Wisconsin  do 
not  stand  out  in  support  of  the  gross  earnings  tax.  Both 
states,  after  giving  it  a  thorough  trial,  have  abandoned  it. 
Wisconsin  had  used  the  system  for  nearly  fifty  years. 
The  reasons  assigned  by  the  officials  of  both  states  for  its 
failure  to  give  satisfaction  were  practically  the  same- 
uniformity  could  not  be  secured  between  the  corporations, 
and  there  was  no  relation  between  the  tax  paid  on  cor- 
porate property  and  that  paid  on  other  property.  The 
governors  under  whose  administrations  the  tax  was  given 
up,  had  pledged  themselves  to  equality  in  taxation. 

1 80.  Taxes  on  Net  Earnings  Have  Not  Been  Satisfac- 
tory.— The  difficulties  of  a  gross  earnings  tax  have  led 
some  to  advocate  and  others  to  refuse  to  give  up  net 
earnings  as  the  proper  base  for  taxes.  Net  earnings  can 
be  used,  either  as  the  direct  base  for  the  tax  or  as  the 
basis  for  finding  the  value  of  the  company.  If  the  capi- 
talized net  earnings  be  taken  as  the  proper  valuation  of  a 
concern,  then  no  account  need  be  taken  of  capital  that 
may  have  been  issued  and  squandered;  of  the  different 
forms  of  stock  exchange  manipulations;  or  of  the  watered 


TAXATION  OF  CORPORATIONS  349 

stock  a  company  may  have.  The  factor  under  considera- 
tion is  what  the  enterprise  is  worth  as  a  productive  agent 
or  as  a  going  concern.  The  original  cost,  or  the  cost  of 
reproduction,  is  not  the  controlling  item  which  determines 
value;  this  is  determined  by  the  one  characteristic- 
power  to  bring  in  a  money  return  over  and  above  expenses. 
The  capitalized  net  income  will  most  nearly  correspond 
to  what  a  purchaser  would  be  willing  to  pay  at  a  natural 
sale — and  the  courts  have  held  this  to  be  the  value  of 
property. 

Mr.  W.  S.  Stevens,  of  the  New  York  Public  Service 
Commission,  expressed  the  opinion  that  the  net  earnings 
tax  was  the  one  which  would  have  the  support  of  basic 
principle.  He  said: 

The  only  course  open  to  the  investor  is  to  select  those  attributes 
which,  in  his  judgment,  would  create  a  desire  for  the  property,  and  then 
estimate  how  much  that  desire  would  induce  a  prospective  purchaser 
to  surrender  for  its  satisfaction.  ...  Its  one  characteristic  which  gives 
it  value  is  its  supposed  power  to  yield,  directly  or  indirectly,  a  moneyed 
return  equal  to  the  investment,  with  a  profit  thereon.  Its  value  lies 
not  in  what  it  is,  but  in  what  it  will  produce,  or  what  it  is  believed  it 
will  produce  in  money.  This  is  the  essential  proposition  upon  which 
all  depends.  Generally  speaking,  what  it  will  produce  in  money  will 
depend  upon  its  earning  power,  directly  or  indirectly.  To  the  ordinary 
investor  it  is  its  direct  earning  power  as  shown  by  the  excess  of  revenues 
over  expenses.  .  .  .  This  fundamental  consideration  indicates  that  the 
net  earnings  rule,  when  properly  and  carefully  applied  with  due  regard 
to  all  the  features  of  the  individual  case,  is  probably  the  one  having 
the  surest  support  of  basic  principle.  It  is  also  the  one  which  accords 
with  the  practice  of  shrewd,  broad-minded,  and  successful  men  of 
business.1 

Objections  to  Net  Earnings. — In  spite  of  the  apparent 
logical  and  theoretical  soundness  of  net  earnings  as  a  tax 
basis,  many  practical  difficulties  are  met  in  its  adminis- 
tration. One  which  has  proved  most  troublesome  is  in 
determining  the  true  net  earnings.  Accounting  systems 
have  been  anything  but  uniform,  and  no  comparison  can 
be  had  between  net  earnings  of  different  enterprises.  Even 

1  Quoted  in  State  and  Local  Taxation,  1912,  p.  194, 


350  OUTLINES  OF  PUBLIC  FINANCE 

with  uniform  accounting,  the  difficulty  still  remains  of 
separating  the  earnings  of  a  corporation  from  those  of 
its  investments  or  subsidiary  undertakings.  Neither 
would  this  system  secure  equality  in  assessment  between 
corporations  and  other  forms  of  taxable  property.  The 
difficulties  which  Wisconsin  and  Michigan  found  with  the 
gross  earnings  tax  would  be  magnified  here.  A  man's 
farm  and  buildings  are  taxed,  even  though  they  are  pro- 
ducing no  more  than  expenses.  Yet  a  railroad  with  an 
investment  of  several  million  dollars  would  not  be  taxed 
until  it  became  operative  to  the  extent  of  having  a  sur- 
plus above  expenses.  Because  of  the  fluctuation  of  earn- 
ings, moreover,  the  tax  could  not  be  counted  upon  as 
being  in  any  degree  stable.  The  Connecticut  commission, 
quoted  above,  characterized  the  net  earnings  tax  as  fol- 
lows: 

To  avoid  serious  inequality  and  evasion  the  tax  On  net  earnings 
would  require  for  administration  a  thorough  examination  into  the 
accounts  of  every  corporation  taxed,  together  with  strict  rules  as  to 
how  these  accounts  should  be  kept.  ...  It  would  be  a  continual  source 
of  irritation  between  the  corporation  and  the  taxing  officials.  It  would 
involve  the  most  disagreeable  inquisition  into  the  accounts  and  busi- 
ness of  the  corporations,  and  in  the  end  would  still  remain  room  for 
personal  judgment,  thus  leaving  open  the  door  to  political  intrigue 
and  corrupt  influence.  .  .  .  The  practical  difficulties  in  the  way  of 
imposing  a  tax  upon  net  earnings  seem  overwhelming.  A  further  ob- 
jection arises  from  the  fact  that  a  corporation  might  have  no  net  earn- 
ings whatever  within  a  given  year,  and  therefore  escape  taxation  en- 
tirely. While  it  is  true  that  this  might  be  perfectly  just  under  a  tax 
system  based  fundamentally  upon  income,  we  should  bear  in  mind 
that  the  American  tax  system  is  to-day  based  upon  property.  The 
individual  whose  property  has  yielded  him  no  income  in  a  given  year 
cannot  offer  that  as  a  reason  why  he  should  not  pay  taxes  upon  his 
property.  While  the  importance  of  treating  corporations  and  individ- 
uals upon  the  same  footing  must  not  be  stretched,  there  can  be  little 
doubt  that  a  tax  system  which  would  allow  corporations  having  no 
net  earnings  to  escape  taxation  entirely,  would  be  out  of  harmony 
with  the  general  tax  system  prevailing  in  America. 

181.  Taxes  upon  Value  Are  Becoming  More  Popular.— 
Many  objections  have  been  made  to  what  has  been  known. 


TAXATION  OF  CORPORATIONS  351 

as  the  ad  valorem  basis  for  taxing  corporations.  These 
objections  have  arisen,  largely,  because  of  a  misunder- 
standing of  the  term,  and  because  of  the  discrepancies 
which  arose  in  attempting  to  use  different  methods  of 
valuation.  The  discrepancies  arose  because  of  the  limited 
powers  and  abilities  of  the  assessors,  and  because  too  few 
factors  were  taken  into  account  in  arriving  at  the  valua- 
tion. The  excess  value  of  the  stocks  and  bonds  over  real 
estate  has  been  tried;  the  average  selling  price  of  the 
securities  over  a  period  of  years  has  also  been  adopted. 
In  using  these  as  bases  for  value,  all  the  manipulations 
of  the  market  and  outside  influences  must  be  considered, 
which  makes  accurate  results  difficult.  Likewise,  in  seek- 
ing to  determine  the  original  cost,  the  cost  of  reproduction, 
capitalized  earnings,  or  the  amount  of  business,  the  ad- 
ministrative difficulties  become  so  great  as  to  forestall 
satisfactory  results  in  many  cases.  A  value  basis  for  tax- 
ing corporations  has  consequently  been  condemned  as 
unusable. 

Present  Meaning  of  Ad  Valorem. — As  the  expression  is 
now  used,  however,  an  ad  valorem  tax  means  one  placed 
upon  a  corporation  as  a  piece  of  property,  rather  than  as 
divided  into  several  elements.  The  system  further  im- 
plies a  more  or  less  expert  valuation  of  the  corporation 
by  some  centralized  state  board.  The  fiscal  officials  of 
Michigan  and  Wisconsin,  upon  discarding  the  earnings 
basis,  adopted  the  ad  valorem  plan,  and  have  given  their 
unqualified  approval  of  the  results.  The  Virginia  Joint 
Committee  on  Tax  Revision,  after  a  careful  analysis  of 
the  different  tax  bases,  said:  "We  believe  that  under  an 
ad  valorem  system,  administered  by  a  competent  board, 
untrammeled  by  any  single  prescribed  standard  or  rule, 
it  is  easier  to  establish  justice  in  taxation  than  under  any 
other  method.77  l 

Conditions  Necessary  for  Success. — The  ability  of  the 
ad  valorem  tax  to  secure  justice  depends,  according  to  the 

1  Report  of  the  Joint  Committee  on  Tax  Revision,  Virginia,  1914. 


352  OUTLINES  OF  PUBLIC  FINANCE 

Virginia  committee,  upon  the  competency  of  the  assessing 
board,  and  upon  the  extent  of  the  power  conferred  upon 
it.  The  importance  of  this  contention  is  at  once  evident. 
It  would  be  considered  absurd  to  send  a  man  or  group  of 
men  whose  lives  had  been  spent  as  sailors,  to  value  an 
automobile.  And  it  would  be  considered  just  as  absurd 
to  instruct  men  who  were  capable  of  valuing  an  automo- 
bile to  arrive  at  such  value  by  taking  into  consideration 
only  the  wheels,  or  motor,  or  top,  or  electrical  system,  or 
tires.  A  particular  automobile  might  have  no  top,  or  no 
electrical  system,  or  the  wheels  might  have  been  newly 
painted,  or  the  tires  might  just  be  worn  out,  so  that  no 
one  of  these  could  be  taken  as  the  determining  factor  in 
its  value.  Likewise  the  bearings,  transmission,  and  cylin- 
ders should  be  examined  to  discover  how  much  they  are 
worn — in  short,  all  parts  should  be  taken  into  considera- 
tion in  determining  its  value. 

In  determining  the  value  of  a  corporation,  likewise,  the 
board  must  not  only  be  competent,  but  it  must  have  broad 
powers.  It  must  be  allowed  to  consider  all  the  factors 
which  may  contribute  to  value — franchise,  earnings,  re- 
production cost,  etc.  Not  only  must  it  be  given  power  to 
consider  all  these  items,  but  it  must  be  given  access  to 
them.  In  order  to  carry  out  its  work  efficiently,  the  books, 
accounts,  and  records  of  the  corporation  must  be  placed 
at  its  disposal.  It  should  be  given  power  to  examine  wit- 
nesses and  require  reports — in  short,  given  every  possible 
privilege  which  will  enable  it  to  make  a  proper  valuation. 
With  this  combination — a  competent  board  with  extensive 
powers — the  prevalent  objections  to  ad  valorem  taxation 
are  somewhat  minimized. 

Relation  Between  a  Tax  on  Value  and  a  Tax  on  Earnings. 
— Where  corporations  are  under  regulation,  as  in  the  case 
of  public  utilities,  there  is  not  such  a  variance  between  a 
tax  on  value  and  a  tax  on  earnings  as  it  might  at  first 
seem.  Where  the  charges  for  services  are  not  regulated, 
there  may  be  no  definite  relation  between  the  value  of  the 


TAXATION  OF  CORPORATIONS  353 

property  in  use  and  its  earnings.  Public  utility  commis- 
sions are  expected  to  fix  rates  so  that  but  a  fair  return 
will  be  realized.  Of  course  there  is  no  absolute  rule  for 
determining  the  value  upon  which  earnings  shall  be  al- 
lowed, and  it  is  impossible  to  determine  value  so  exactly, 
or  to  fix  rates  so  accurately  in  each  case,  that  only  a  fair 
return  will  be  realized.  But  the  more  nearly  this  is  ap- 
proximated the  more  nearly  will  a  tax  on  earnings  corre- 
spond to  one  on  value. 

It  could  make  but  little  difference  in  a  case  of  perfect 
valuation  and  regulation  of  charges,  where  10  per  cent 
were  allowed  as  a  fair  return,  whether  10  per  cent  of  the 
net  earnings  were  taken  or  1  per  cent  of  the  valuation. 
Because  of  the  indefinite  relation  between  net  and  gross 
returns,  however,  there  could  not  be  this  close  approxi- 
mation between  a  gross  earnings  tax  and  a  tax  on  value, 
even  if  regulation  could  be  such  as  to  allow  exactly  a  fair 
return.  Yet  they  would  more  nearly  correspond  than 
under  a  system  of  no  regulation. 

Reform  in  Local  Taxes. — The  adoption  of  some  central 
system  of  assessment  would  open  the  way  for  securing 
reform  in  the  local  taxation  of  corporations,  with  but 
little  added  burden  of  expense.  The  entire  abolition  of 
local  assessments  might  be  secured  if  the  localities  could 
be  made  to  see  that,  by  such  a  change,  they  would  not 
be  the  losers,  and  if  legislators  could  be  made  to  see  that 
greater  equality  could  be  secured  thereby.  Some  states 
have  already  recognized  the  advisability  of  having  all 
assessments  made  by  central  authorities,  where  the  plants 
extend  into  more  than  one  taxing  district.  With  the 
central  board  and  machinery  already  in  existence  and 
making  valuations,  the  addition  of  taxes  for  local  pur- 
poses could  be  made  very  easily,  and  the  proceeds  dis- 
tributed to  the  local  districts. 

Difficulty  might  arise  in  choosing  a  basis  for  this 
distribution.  Possibilities  would  be  the  length  of  track- 
age, line,  or  mains,  the  amount  of  business  arising  within 


354  OUTLINES  OF  PUBLIC  FINANCE 

the  district,  or  the  amount  of  property  found  there.  The 
first  basis  appears  the  most  equitable,  since  the  others 
involve  the  valuation  of  parts  of  a  business  and  open  the 
way  for  inequalities.  Where  business  is  greatest,  more- 
over, tracks,  lines,  or  mains  are  duplicated,  so  that  the 
amount  of  business  is  reflected  in  the  extent  of  these 
factors. 

182.  Taxes  on  Public  Utilities  Are  No  Longer  Needed 
for  Regulation. — The  important  function  of  securing  jus- 
tice between  the  public  and  the  corporation,  which  be- 
longed to  the  early  taxes  upon  public  utilities,  no  longer 
remains.  The  public  service  commissions  are  expected 
to  secure  justice  between  the  utility  and  the  public  as  to 
rates  and  services,  which  deprives  the  tax  of  its  regulatory 
aspects  and  leaves  it  only  as  a  fiscal  measure.  To  con- 
tinue a  tax  for  the  purpose  of  regulation  reflects  on  the 
ability  of  these  commissions  to  accomplish  their  purpose. 
If  their  purpose  is  accomplished,  however,  no  excess  values 
appear  to  be  taken  by  special  taxes. 

Under  regulation,  then,  the  question  of  taxation  re- 
solves itself  into  this :  Are  the  corporations  to  be  regarded 
as  existing  for  the  benefit  of  the  users,  for  the  community 
viewed  as  a  body  of  taxpayers,  or  for  both?  If  regarded 
as  existing  for  the  former,  then  the  rates  will  be  low  and 
there  will  be  nothing  left,  above  a  fair  return,  for  taxes; 
if  for  the  community  of  taxpayers,  then  high  rates  will  be 
charged  for  service,  with  some  curtailment  of  use;  if  for 
both,  moderate  rates  will  exist  with  a  moderate  surplus 
for  taxes. 

When  a  corporation  pays  a  tax  under  a  system  of  regu- 
lation, it  merely  acts  as  a  collector  of  that  tax  from  the 
user  of  the  product.  The  net  earnings  must  be  large 
enough  to  allow  a  fair  return.  In  ascertaining  net  earn- 
ings, taxes  are  one  of  the  items  to  be  deducted  from  gross 
receipts.  If  taxes  were  abolished,  the  total  income  of  a 
company  could  be  reduced  by  the  amount  of  the  taxes 
and  the  net  earnings  would  remain  the  same. 


TAXATION  OF  CORPORATIONS  355 

Since  taxes  increase  the  burden  to  the  consumer,  some 
have  advocated  the  abolition  of  taxes  on  public  service 
corporations,  while  others  would  make  the  taxes  com- 
paratively light.  Such  taxes  are,  of  course,  class  taxes — • 
taxes  upon  the  particular  class  of  individuals  using  the 
product.  This  abolition  would  but  mean  a  larger  tax  to 
be  paid  by  the  owners  of  other  property.  When  consid- 
ering all  classes  of  property,  it  would  seem  no  more  than 
fair  to  tax  the  property  of  these  regulated  corporations 
to  the  same  extent  that  other  property  is  taxed,  and  in 
such  a  way  as  to  equalize  the  burden  on  the  different 
classes  of  property. 

183.  New  York  Furnishes  the  Best  Example  of  Special 
Franchise  Taxation. — The  system  for  taxing  public  utili- 
ties in  New  York  may  again  be  called  upon  to  furnish  the 
best  illustration  of  an  attempt  to  tax  the  special  franchise 
of  a  corporation.  This  is  found  in  what  is  known  as  the 
Special  Franchise  Tax  law.  The  law  was  adopted  in  1899 
largely  through  the  influence  of  Governor  Roosevelt,  and 
with  but  little  agitation  from  the  public.  The  law  at  once 
received  extended  favorable  comment,  and  was  heralded 
by  many  as  the  last  word  in  public  utility  taxation.  Con- 
trary to  expectations,  however,  the  principle  has  not  been 
adopted  by  other  states,  and  has  proved  one  of  the  most 
troublesome  features  in  New  York's  tax  laws. 

The  provisions  of  the  law  are  somewhat  as  follows: 
Under  the  term  "real  estate"  is  included  the  value  of  all 
franchises,  rights,  or  permissions  to  construct,  maintain, 
or  operate  in,  under,  through,  or  above  the  streets,  high- 
ways, or  public  places.  Each  of  these  franchises  is  to  be 
assessed  annually  by  the  board  of  state  tax  commissioners, 
and  the  value  sent  back  to  the  clerk  of  the  assessment  dis- 
trict where  the  franchise  is  located,  as  the  tax  is  to  be 
collected  for  local  purposes.  All  assessments  by  the  com- 
mission are  subject  to  court  review.  Assessment  difficul- 
ties led  to  the  modification  of  the  original  law,  so  that  all 
uses  of  public  property  outside  of  incorporated  villages, 


356  OUTLINES  OF  PUBLIC  FINANCE 

of  less  than  two  hundred  feet  in  length,  are  not  considered 
special  franchises. 

Problem  of  Valuation. — The  problem  of  finding  a  satis- 
factory method  of  valuing  these  franchises  has  proved 
almost  insurmountable.  The  companies  have  not  been 
satisfied,  and  have  filled  the  courts  with  litigation.  In 
New  York  City,  where  most  of  these  franchises  appear, 
nearly  one  fourth  of  the  taxes  assessed  against  them  from 
the  beginning  still  await  final  adjustment.  Many  rules 
have  been  submitted  for  the  proper  mode  of  reaching  the 
special  franchise  values,  but  none  has  proved  satisfactory. 
The  task  of  placing  an  annual  value  by  a  centralized 
board  upon  some  fourteen  thousand  special  franchises 
scattered  over  the  state,  presents  a  problem  of  some 
magnitude.  In  reality,  moreover,  if  the  regulation  by  the 
public  service  commissions  be  a  success,  there  is  no  place 
for  these  special  franchise  values  to  appear.  Their  re- 
tention simply  means  that  higher  rates  must  be  allowed 
for  services  in  order  that  the  companies  get  what  is  con- 
sidered a  fair  return. 

184.  Some  Corporations  Have  Been  Taxed  in  Special 
Classes. — Other  kinds  of  corporations  besides  public  utili- 
ties have  been  put  in  special  classes  for  the  purpose  of 
taxation.  Some  of  the  most  general  of  these  classes  are 
banks,  insurance  companies,  and,  frequently,  manufac- 
turing industries. 

Taxation  of  Banks. — With  the  passage  of  the  National 
Banking  Act,  the  taxation  of  banks  by  the  states  became 
entangled  with  constitutional  restrictions,  and  Federal 
legislation  and  court  decisions  were  necessary  to  establish 
the  status  of  bank  taxation.  This  taxation  by  the  various 
states  has  been  very  unequal,  varying  from  very  lenient 
legislation  in  some  to  almost  repressive  legislation  in 
others.  This  situation  exists  because  of  the  difference  in 
the  attitude  which  has  been  taken  toward  the  taxation  of 
banking  capital.  Some  have  advocated  a  high  tax,  while 
others  favor  complete  exemption.  The  one  class  looks 


TAXATION  OF  CORPORATIONS  357 

upon  banks  as  favored  creatures  of  the  government, 
while  the  other  looks  upon  them  as  essential  to  business 
prosperity,  and  seeks  to  establish  them  more  extensively. 

All  sorts  of  productive  capital  might  be  more  remu- 
nerative if  it  were  not  taxed,  yet  the  state  must  have 
revenue.  The  banking  business  is  not  of  such  a  nature  as 
to  suggest  any  clear  reason  why  it  should  bear  especially 
high  or  especially  low  taxes.  The  granting  of  franchises 
to  such  institutions  in  no  sense  gives  them  a  monopoly  or 
increases  their  earning  power.  Moreover,  banks  render 
a  necessary  service  and  are  essential  to  business  opera- 
tions. By  furnishing  credit  when  needed  they  help  to 
develop  productive  business  enterprise,  and  thus  enlarge 
the  basis  of  taxation.  If  banks  are  unduly  burdened, 
banking  facilities  will  be  correspondingly  lessened.  It 
would  seem  reasonable,  therefore,  not  to  tax  them  to  such 
an  extent  as  appreciably  to  hinder  capital  from  seeking 
that  form  of  investment.  Care  should  also  be  taken  that 
discriminating  tax  burdens  are  not  placed  upon  essen- 
tially competing  institutions.  The  modern  trust  com- 
pany, for  example,  has  developed  so  many  banking  prac- 
tices as  to  be  a  competitor  with  banks,  and  should  be 
treated  as  such  by  tax  laws. 

Taxation  of  Insurance  Companies. — Much  discussion 
has  arisen  over  the  proper  method  for  taxing  insurance 
companies,  especially  those  doing  a  life  insurance  busi- 
ness. It  is  often  contended  that  insurance  companies 
should  be  taxed  very  lightly,  if  at  all,  since  the  burden  is 
shifted  to  the  policyholder.  Life  insurance  is  looked  upon 
as  an  institution  which  makes  for  the  public  welfare  be- 
cause, in  providing  for  many  who  might  otherwise  become 
dependents,  it  has  cut  down  the  burden  of  state  expendi- 
tures. In  opposing  such  taxation,  the  beneficent  features 
are  extolled;  the  provision  for  widows  and  orphans  is  em- 
phasized; this  wise  provision  for  the  future  is  pictured; 
the  incentive  to  providence  and  thrift  is  pointed  out; 
the  assets  of  the  company  are  shown  to  be  the  accumu- 


358  OUTLINES  OF  PUBLIC  FINANCE 

lated  savings  of  the  policy  holders.  A  tax  upon  life  in- 
surance companies,  then,  falls  upon  this  form  of  savings, 
and  is  consequently  undesirable. 

Such  a  conclusion  would  condemn  a  large  part  of  the 
general  scheme  of  taxation.  All  taxes  are  burdens  upon 
savings  and  restrictions  upon  thrift.  The  problem  in  tax- 
ing insurance  companies  is  to  levy  a  tax  upon  them  which 
will  be  equitable  with  that  placed  upon  other  forms  of 
investment.  Peculiar  difficulties  arise  in  that  the  length 
of  time  a  company  has  been  in  existence  is  an  important 
factor,  the  premiums  are  not  income,  the  companies  take 
on  so  many  different  forms,  and  do  business  in  so  many 
tax  jurisdictions. 

The  tax  which  is  most  generally  used  by  the  states  is 
a  percentage  levy  upon  the  gross  premiums.  While  this, 
no  doubt,  introduces  some  injustices,  and  while  the  rate 
varies  considerably  from  state  to  state,  yet  no  other  pro- 
posed plan  has  appeared  so  satisfactory.  An  added  justi- 
fication for  some  payment  is  to  maintain  the  insurance 
department  in  the  state  which  renders  the  companies 
safer  and  more  serviceable  to  the  public.  This  is  a  special 
service,  and  should  at  least  command  enough  from  those 
benefited  to  pay  the  cost  of  the  service. 

Taxation  of  Manufacturing  Corporations. — In  the  earlier 
history  of  corporation  taxation,  manufacturing  concerns 
were  usually  treated  more  leniently  than  other  corpora- 
tions, or  were  entirely  exempt  from  taxes.  A  number  of 
states  even  yet  exempt  this  form  of  industry,  to  a  great 
extent,  from  tax  burdens.  There  is  no  good  reason,  how- 
ever, why  manufacturing  concerns  should  not  bear  their 
share  of  the  public  burden.  They  can  no  longer  be  con- 
sidered as  infant  industries  which  need  the  fostering  hand 
of  the  state.  The  men  who  put  capital  into  such  enter- 
uprises  have  no  more  claim  to  exemption  than  those  who 
invest  hi  other  industries.  The  problem  of  taxing  this 
form  of  business  is  the  problem  of  taxing  capital  in  general 
in  a  just  and  equitable  manner.  The  taxation  should  be 


TAXATION  OF  CORPORATIONS  359 

such,  however,  that  there  will  be  no  discrimination  in 
favor  of  particular  fields  of  business  endeavor,  and  uni- 
formity should  be  extended,  if  possible,  throughout  the 
whole  competitive  district. 

185.  Taxation  of  Foreign  Corporations  Has  Proved 
Troublesome. — A  foreign  corporation  is  one  whose  charter 
is  granted  in  some  other  state  than  the  one  in  which  the 
business  of  the  corporation  is  located.  Corporations, 
moreover,  do  not  come  under  the  "  privileges  and  immuni- 
ties granted  to  the  citizens  of  the  states"  clause  of  the 
Federal  Constitution,  but  may  be  singled  out  for  special 
legislation.  Two  opposite  policies  have  been  followed  in 
treating  this  foreign  capital — either  treat  foreign  corpora- 
tions leniently  to  attract  foreign  capital,  or  treat  them 
severely  to  protect  domestic  capital. 

With  forty-eight  states,  each  legislating  on  the  matter, 
no  semblance  of  uniformity  in  the  taxation  of  foreign 
corporations  can  be  expected.  States  sometimes  adopt 
retaliatory  features  in  their  tax  legislation.  These  laws 
provide  that,  if  any  other  state  impose  heavier  burdens 
upon  its  foreign  corporations  than  had  been  provided  for 
by  domestic  legislation,  then  foreign  corporations  of  that 
state  shall  be  taxed  to  the  same  extent  as  it  would  inflict 
burdens  upon  its  foreign  corporations.  The  result  has 
been  the  multiplication  of  taxes  upon  foreign  corpora- 
tions, and  especially  upon  those  engaged  in  life  insurance. 

Some  uniform  system  of  taxing  such  corporations  would, 
of  course,  be  the  most  desirable,  if  states  provided  a  uni- 
form plan  for  taxing  domestic  corporations.  This  is  not 
to  be  expected,  and  foreign  corporations  should  be  taxed 
in  such  a  way  that  the  burden  upon  them  does  not  vary 
greatly  from  the  burden  placed  upon  domestic  concerns 
in  the  same  line  of  business.  No  good  reason  appears  for 
placing  especially  heavy  burdens  upon  a  business  just 
because  it  is  incorporated  in  another  state,  nor  is  there 
any  reason  for  especial  leniency.  The  most  logical  ideal 
is  to  place  the  same  burdens  upon  similar  enterprises 


360  OUTLINES  OF  PUBLIC  FINANCE 

wherever  they  are  organized,  and  to  do  this  the  same 
methods  of  taxation  must  be  used  for  domestic  and  for- 
eign corporations. 

It  would  be  difficult  to  get  equality  of  burdens  in  a 
state  that  taxed  the  capital  of  domestic  corporations  if  a 
tax  were  placed  upon  earnings  of  foreign  companies  of 
the  same  nature.  Even  if  the  same  method  be  used,  the 
difficulty  still  remains  of  determining  what  part  of  a 
•  corporation  should  be  taxed  to  each  of  the  various  states 
in  which  it  may  be  doing  business.  One  commonly  used 
plan  is  to  compare  the  amount  of  assets  within  a  state 
to  the  total  assets,  and  levy  the  tax  accordingly.  This 
comparison  is  not  always  good.  For  example,  an  adver- 
tising corporation  might  be  doing  a  large  business  in 
several  states  and  have  no  assets  except,  perhaps,  in  one 
state.  A  more  just  basis  of  comparison  would  be  to  levy 
the  taxes  in  proportion  to  the  amount  of  business  arising 
in  the  different  states. 

1 86.  The  Federal  Government  Taxes  Corporations. — 
For  a  number  of  years  corporations  were  regarded  as  a 
source  of  revenue  solely  for  state  purposes.  More  re- 
cently, however,  the  Federal  government  has  begun  to 
use  the  corporate  form  of  organization  as  a  source  of 
revenue.  The  introduction  of  the  excess  profits  tax  is  a 
familiar  example  of  this  situation  which  arose  because  of 
the  Great  War.  This  aspect  of  the  tax  will  be  noted  in  a 
later  chapter.  Even  before  the  war,  however,  Congress 
decided  to  tap  this  source  of  revenue,  and  in  1909  placed 
a  tax  on  the  net  earnings  of  corporations. 

Law  of  1909. — The  law  of  1909  grew  out  of  a  discussion 
of  the  Payne- Aldrich  Tariff  Act,  as  a  part  of  which  many 
Senators  favored  enacting  an  income  tax.  The  fear  of  un- 
constitutionality  of  the  income  measure  led  to  the  sub- 
stitution of  the  so-called  excise  tax  on  corporations  in 
proportion  to  their  income,  which  is  a  part  of  the  Tariff 
Act  of  1909.  The  law  provides  that  every  corporation, 
joint  stock  company,  or  association,  organized  for  profit 


TAXATION  OF  CORPORATIONS  361 

and  having  a  capital  stock  represented  by  shares,  and 
every  insurance  company  now  in  existence  or  afterward 
organized  in  the  United  States,  or  in  any  foreign  country, 
and  doing  business  in  the  United  States,  shall  be  subject 
to  pay  annually  a  special  excise  tax  with  respect  to  the 
carrying  on  or  doing  business  by  such  corporation,  joint 
stock  company,  or  association,  or  insurance  company, 
equivalent  to  1  per  cent  upon  the  entire  net  income  over 
and  above  five  thousand  dollars  received  by  it  from  all 
sources  during  the  year. 

The  law  goes  into  detail  in  specifying  the  deductions 
which  are  allowed  in  calculating  the  net  income.  The 
statement  of  the  nature  of  the  tax — a  special  excise  tax 
equivalent  to  1  per  cent  upon  the  entire  net  income — was 
evidently  an  attempt  to  get  around  the  constitutional 
limitations  as  to  the  levy  of  direct  taxes  by  the  Federal 
government.  The  Supreme  Court  later  acquiesced  in 
this  interpretation,  by  holding  that  such  a  tax  is  not  a 
direct  tax  within  the  meaning  of  the  Constitution,  and 
that  it  is  within  the  power  of  Congress  to  indicate  the 
method  by  which  an  excise  tax  shall  be  measured.1 

187.  Taxes  Have  Been  Placed  upon  the  Transfer  of 
Corporate  Securities. — In  recent  years  some  states  have 
placed  a  tax  upon  the  transfer  of  corporate  shares  of 
stock.  In  reality  this  is  not  a  tax  upon  corporations,  but 
upon  the  exchange  or  sale  of  shares  of  stock  which  has 
but  an  indirect  effect  upon  the  corporations  themselves. 
Several  proposals  for  such  a  law  were  made  in  New  York 
before  it  was  enacted  in  1905.  By  this  Act  a  tax  of  two 
cents  on  every  one  hundred  dollars  face  value  was  placed 
upon  the  sale  or  exchange  of  shares  and  certificates  of 
stock  of  all  foreign  and  domestic  corporations. 

Much  opposition  to  the  law  developed  and  its  consti- 
tutionality was  attacked  from  every  possible  angle.  Both 
the  Court  of  Appeals  of  New  York  and  the  Supreme 
Court  of  the  United  States  refused  to  admit  the  conten- 

1  For  modifications  brought  about  by  the  war,  see  Chapter  XIX,  p.  468. 


362  OUTLINES  OF  PUBLIC  FINANCE 

tions  that  such  an  Act  was  class  legislation  and  inter- 
fered with  interstate  commerce.  The  decision  was  that 
the  tax  was  not  upon  property,  but  upon  the  transfer  of 
property.  Since  it  was  uniform  in  operation  on  all  trans- 
fers, and  upon  all  persons  making  them,  it  contravened 
neither  the  state  nor  Federal  constitutions. 

Some  administrative  difficulties  developed,  such  as 
locating  the  transfers  and  preventing  evasion  through 
the  use  of  washed  stamps.  These  difficulties  have  been 
practically  eliminated,  and  the  tax  is  a  resourceful,  yet 
little  felt,  source  of  revenue.  It  would  be  more  just,  per- 
haps, if  the  tax  were  based  upon  the  market  value  rather 
than  the  par  value  of  the  stock.  There  is  no  very  good 
reason  for  taxing  a  one  hundred  dollar  share  selling  for 
twenty-five  dollars,  as  much  as  one  selling  for  three  hun- 
dred dollars.  Such  a  basis,  however,  would  greatly  in- 
crease the  administrative  difficulties. 

During  the  Great  War  the  Federal  government  imposed 
a  similar  tax  upon  all  sales  or  transfers  of  stocks.  This 
tax  was  also  a  tax  of  two  cents  on  each  one  hundred  dol- 
lars or  fraction  thereof.  If  the  shares  have  no  face  value, 
the  tax  is  two  cents  on  each  share,  unless  the  market 
value  is  more  than  one  hundred  dollars,  in  which  case  the 
tax  is  two  cents  on  each  one  hundred  dollars  or  fraction 
thereof. 

ADDITIONAL  HEADING 

Seligman,  Essays  in  Taxation,  chaps,  vi,  vii,  viii. 

Report  of  Commissioner  of  Corporations  on  Systems  of 
Taxing  Corporations. 

Proceedings  of  the  National  Tax  Association,  1911,  pp. 
139-231;  1912,  pp.  177-211:  1914,  pp.  132-150;  1919, 
pp.  35-68,  230-260. 


CHAPTER  XVI 

THE  SINGLE  TAX 

1 88.  The  Proposal  for  a  Single  Tax  Is  Not  a  New  One. 
— The  expression  " Single  Tax"  is  familiar  to  everyone 
who  has  the  least  interest  in  fiscal  reform.  Because  of  the 
extensive  propaganda  which  has  developed  in  recent  years, 
the  single  tax  movement  is  often  considered  as  a  new  pro- 
posal and  as  having  distinct  application  to  the  taxation 
of  land  values.  While  the  expression,  in  general,  has  come 
to  have  such  an  interpretation,  the  fact  must  not  be  over- 
looked that  many  different  proposals  have  been  made 
for  a  single  tax,  and  at  various  stages  in  the  development 
of  economic  history. 

The  Impdt  Unique. — One  of  the  most  interesting  pro- 
posals for  a  single  tax  was  the  impot  unique,  proposed  and 
championed  in  France  about  the  middle  of  the  eighteenth 
century  by  the  Physiocratic  School,  of  which  Turgot, 
Quesnay,  and  Mirabeau  were  leaders.  This  school  rea- 
soned that  the  net  product  (produit  net)  of  agriculture  was 
the  basis  of  all  progress,  and  in  the  final  analysis  the  place 
where  the  burden  of  all  taxes  rested.  The  basis  of  all 
industry  and  commerce — raw  materials,  food  supplies, 
etc. — ultimately  came  from  the  land,  and  hence  any  tax 
burden,  wherever  placed,  must  be  met  finally  from  the 
products  of  land.  A  tax  upon  the  products  of  land  was 
therefore  preferred  as  a  direct  and  open  burden  to  some 
other  tax  that  would  be  shifted,  perhaps  by  an  expensive 
process,  to  the  same  source. 

Much  was  accomplished  in  putting  the  system  into 
effect  until  glaring  inequalities  in  the  tax  burdens  became 


364  OUTLINES  OF  PUBLIC  FINANCE 

apparent.  Citizens  with  large  incomes  from  stocks,  with 
unquestioned  ability  to  meet  fiscal  burdens,  were  escaping 
entirely,  while  the  poor  landowners  were  able  to  meet 
the  tax  burden  only  with  the  greatest  difficulty.  The  in- 
justice became  so  marked,  and  the  dissatisfaction  so  evi- 
dent, that  the  impot  unique  was  abandoned. 

Single  Tax  on  Incomes. — Not  all  single  tax  proposals 
have  been  for  land  taxes.  As  a  means  for  social  as  well  as 
fiscal  reform,  the  Socialists  have  proposed  a  single  tax  to 
be  levied  upon  incomes.  The  primary  purpose  of  the 
proposal  is  to  accomplish  a  redistribution  of  wealth 
through  a  steeply  progressive  rate.  As  Professor  Plehn 
has  pointed  out,  such  a  scheme  as  an  exclusive  tax  system 
would  fail  because  (1)  it  presupposes  for  its  successful 
administration  a  method  of  distribution  of  wealth  very 
different  from  that  which  the  world  now  has;  (2)  it  de- 
mands a  perfection  in  the  technic  of  administration  as 
yet  absolutely  unattainable;  (3)  it  would  need,  in  order 
to  be  administered  fairly,  more  honesty  than  men  have 
yet  shown  in  their  dealings  with  the  government.1  The 
income  tax,  no  doubt,  will  come  more  and  more  into  use 
as  a  part  of  fiscal  systems  as  income  taxes  come  to  be 
looked  upon  with  greater  favor.  The  primary  reason  for 
its  use,  however,  will  continue  to  be  fiscal  rather  than 
social. 

189.  Henry  George  Was  Responsible  for  the  Modern 
Single  Tax  Proposal. — The  active  propaganda  for  the 
modern  single  tax  has  been  in  progress  for  less  than  half 
a  century,  yet  nearly  every  principle  around  which  the 
theory  is  formulated  was  propounded  years  before,  in 
various  countries,  by  numerous  writers.  The  exposition 
of  the  nature  of  rent  by  Ricardo  and  Mill  gave  strength 
to  the  ideas  of  social  wealth  and  unearned  increment. 
The  principle  of  the  natural  right  to  land  was  developed 
by  a  number  of  early  philosophical  writers.  Adam  Smith 
has  many  references  to  the  nature  of  rents,  and  indicates 

1  Carl  C.  Plehn,  Introduction  to  Public  Finance,  third  ed.,  p.  135. 


THE  SINGLE  TAX  365 

their  peculiar  ability  to  bear  the  burden  of  taxes.  Other 
writers  acquiesced,  yet  none  went  so  far  as  to  attempt  to 
make  any  practical  application  of  their  teachings. 

Progress  and  Poverty. — The  first  attempt  to  put  these 
teachings  to  practical  use  was  made  by  Henry  George, 
in  the  publication  of  his  well-known  work,  Progress  and 
Poverty,  in  1879.  Nor  did  he  stop  with  the  publication  of 
the  principles  in  which  he  so  firmly  believed,  but  devoted 
the  rest  of  his  life  to  securing  their  application  to  actual 
economic  conditions.  For  a  number  of  years  before  the 
publication  of  his  work,  George  had  lived  in  California, 
where  he  had  a  chance  to  witness  in  a  few  years  develop- 
ments in  land  ownership  which  ordinarily  occur  only  after 
decades.  The  situation  was  caused  by  the  phenomenal 
development  which  followed  the  discovery  of  gold.  While 
most  of  the  principles  enunciated  in  Progress  and  Poverty 
are  not  new,  George  did  not  know  that  they  had  been 
stated  previously,  and  they  were  formulated  by  him  out 
of  his  own  thinking  and  experiences.  While  much  other 
literature  has  been  written  on  the  single  tax,  Progress  and 
Poverty  still  holds  first  rank  as  exponent  of  the  doctrine. 

190.  The  Single  Tax  Program  Has  a  Broad  Social  as 
Well  as  Fiscal  Significance. — The  usual  inference  from  the^ 
mention  of  taxes  is  that  something  of  a  fiscal  significance 
is  intended.  The  fiscal  aspects  of  the  single  tax  are  over- 
shadowed to  some  extent  by  the  contemplated  social  re- 
sults of  its  adoption.  A  study  of  the  underlying  principles 
will  elucidate  this  feature  of  the  program.  The  fiscal  part 
of  the  scheme  ends  by  declaring  for  the  abolition  of  all 
taxes  except  those  on  land  values. 

Social  Vision  of  George. — The  reasoning  upon  which 
George  based  his  conclusion  was  somewhat  as  follows: 
Land  is  a  gift  of  nature,  and  not  the  product  of  man's 
labor.  Man  has  a  right  to  possess  only  the  products  of 
his  labor,  and  therefore  private  ownership  in  land  cannot 
be  justified.  Man  is  not  responsible  for  differences  in 
land  values,  nor  for  increases  in  values,  consequently 


366  OUTLINES  OF  PUBLIC  FINANCE 

these  differences  and  increases  should  go  to  society  in  the 
form  of  taxes.  The  abolition  of  all  other  taxes  naturally 
follows,  since  they  are  a  burden  upon  the  product  of  labor, 
and  everyone  has  a  natural  right  to  the  product  of  his 
labor.  George  believed  that  more  revenue  would  be 
secured  than  under  the  existing  system,  which  surplus 
could  be  applied  to  the  common  benefit.  He  said: 

We  could  establish  public  baths,  museums,  libraries,  gardens,  lecture 
rooms,  music  and  dancing  halls,  theaters,  universities,  technical  schools, 
shooting  galleries,  playgrounds,  gymnasiums,  etc.  Heat,  light,  and 
motive  power,  as  well  as  water,  might  be  conducted  through  our  streets 
at  public  expense;  our  roads  be  lined  with  fruit  trees;  discoverers  and 
inventors  rewarded,  scientific  investigations  supported;  and  in  a 
thousand  ways  the  public  revenues  made  to  foster  efforts  for  the  pub- 
lic benefit.1 

Platform  of  Single  Tax  League. — That  the  advocates  of 
the  single  tax  claim  that  it  is  much  more  than  a  mere 
revenue  system — in  fact,  that  it  approaches  a  panacea 
for  all  social  miseries — is  evidenced  by  the  platform 
adopted  by  the  National  Conference  of  the  Single  Tax 
League  of  1890.  The  part  which  sets  forth  the  anticipated 
results  of  its  adoption  reads: 

It  would  make  the  holding  of  land  unprofitable  to  the  mere  owner, 
and  profitable  only  to  the  user.  It  would  thus  make  it  impossible  for 
speculators  and  monopolists  to  hold  natural  opportunities  unused  or 
only  half  used,  and  would  throw  open  to  labor  the  illimitable  field  of 
employment  which  the  earth  offers  to  man.  It  would  thus  solve  the 
labor  problem,  do  away  with  involuntary  poverty,  raise  wages  in  all 
occupations  to  the  full  earnings  of  labor,  make  overproduction  impos- 
sible until  all  human  wants  are  satisfied,  render  labor-saving  inventions 
a  blessing  to  all,  and  cause  such  an  enormous  production  and  such  an 
equitable  distribution  of  wealth  as  would  give  to  all  comfort,  leisure, 
and  participation  in  the  advantages  of  an  advancing  civilization. 

Quasi  Single  Taxers. — If  the  principles  upon  which  the 
single  tax  is  based  were  recognized,  generally,  as  sound, 
and  if  it  were  believed  that  such  an  economic  Utopia  as 

1  Progress  and  Poverty,  bk.  ix,  chap.  iv. 


THE  SINGLE  TAX  367 

the  one  pictured  in  the  above  paragraph  would  result  from 
its  adoption,  a  much  wider  use  of  the  scheme  would  be 
found,  doubtless,  than  exists  at  present,  and  a  much 
larger  number  of  ardent  disciples  would  be  seeking  its 
universal  adoption.  As  it  is,  many  of  the  present  followers 
have  ceased  to  place  emphasis  upon  the  "Single"  of  the 
scheme,  and  are  content  to  secure  the  adoption  of  fiscal 
principles  which  partake  of  the  nature  of  the  George  pro- 
posal as  a  part  of  a  tax  system.  These  might  be  called 
quasi  single  taxers,  and  their  proposals  have  been  termed 
by  some  as  the  single  tax  limited.  Because  the  single 
tax  has  been  so  extensively  advocated,  every  citizen 
should  know  something  of  the  proposal,  the  tactics  of 
propaganda,  and  some  of  the  economic  effects  of  its  adop- 
tion. A  brief  study  of  some  of  the  outstanding  features 
of  the  single  tax  principle  will  be  undertaken  in  the  fol- 
lowing pages. 

191.  The  Principle  of  Natural  Rights  Is  Not  Generally 
Indorsed. — That  land  is  a  gift  of  nature  is  accepted  as  a 
matter  of  course;  but  the  principle  of  natural  rights,  as 
propounded  by  Henry  George,  has  not  been  indorsed  to 
any  great  extent.  It  is  for  philosophers  to  decide  when  a 
natural  right  exists,  whether  there  ever  was  or  will  be  such 
a  thing,  or  whether  the  same  natural  right  will  continue 
to  exist  throughout  all  tune.  As  far  as  the  single  tax 
proposal  is  concerned,  an  individual  has  a  natural  property 
right  to  the  fruits  of  his  labor,  but  not  to  the  gifts  of 
nature.  The  conclusion  follows  that  property  rights  may 
be  had  in  the  improvements  on  land,  but  not  hi  the  land 
itself. 

A  little  consideration  will  show  such  a  distinction  to  be 
one  without  a  difference — or,  at  best,  only  a  difference  of 
degree.  Here  is  a  farm,  a  gift  of  nature,  and  on  it  a 
dwelling  house,  a  product  of  man's  labor.  But  when  a 
little  closer  consideration  is  given  to  the  house,  nature 
appears  to  have  played  a  considerable  part  in  making 
provision  for  it.  The  clay  in  the  brick  was  taken  from 

24 


368  OUTLINES  OF  PUBLIC  FINANCE 

the  hillside;  the  oak  in  the  floors  was  taken  from  the 
forest;  the  glass  in  the  windows  was  accumulated  from 
various  places.  The  entire  building  was  a  gift  of  nature- 
man  has  no  more  power  to  create  houses  than  to  create 
land.  He  simply  changed  the  materials  of  nature  to  make 
them  more  serviceable,  the  difference  being  that  he 
exerted  more  effort  on  some  than  on  others. 

Man  also  changes  the  nature  of  land,  in  a  different  way, 
perhaps,  to  make  it  more  useful.  He  plows  under  vege- 
tation to  make  it  more  fertile;  he  plants  the  corn  in  rows 
around  the  hillside  to  prevent  erosion;  he  surrounds  the 
land  with  a  fence  to  prevent  destruction  from  the  tres- 
pass of  animals.  All  this  is  work  upon  the  land  to  make 
it  more  useful,  just  as  work  was  done  upon  the  materials 
in  the  house  to  make  them  more  serviceable.  Either 
private  ownership  is  justified  in  land  or  it  is  justified  in 
no  material  thing,  for  every  material  thing  is  based  upon 
some  gift  of  nature. 

192.  Social  Values  and  Unearned  Increments  Are  Not 
Confined  to  Land. — It  is  quite  true  that  man  is  not  re- 
sponsible for  many  of  the  differences  in  land  values. 
Nature  is  responsible  for  differences  of  fertility  and  loca- 
tion, and  society  has  been  responsible,  no  doubt,  for  many 
increases  in  value.  The  present  owners  of  these  better 
farms  or  sites  frequently  have  paid  the  capitalized  rental 
for  the  privilege  of  such  ownership,  and  evidently  would 
take  unkindly  to  the  following  proposition  of  Mr.  George: 

I  do  not  propose  to  purchase  or  to  confiscate  private  property  in 
land.  The  first  would  be  unjust;  the  second,  needless.  Let  the  indi- 
viduals who  now  hold  it  still  retain,  if  they  want  to,  possession  of 
what  they  are  pleased  to  call  their  land.  Let  them  continue  to  call  it 
their  land.  Let  them  buy  and  sell,  and  bequeath  and  devise  it.  We 
may  safely  leave  them  the  shell  if  we  take  the  kernel.  It  is  not  neces- 
sary to  confiscate  land;  it  is  only  necessary  to  confiscate  rent.1 

Not  All  Land  Values  Unearned. — The  institution  of 
private  property  has  been  too  firmly  established,  and  the 

1  Progress  and  Poverty,  bk.  viii,  chap.  ii. 


THE  SINGLE  TAX  369 

principles  of  transfer  and  priority  too  deeply  rooted,  for 
landowners  to  submit  passively  to  any  such  proposition 
as  the  above.  A  substitute  proposal,  which  will  be  dis- 
cussed later,  that  all  future  social  values  be  taken  in  taxes, 
has  been  made  by  some  quasi  disciples  of  Henry  George. 
It  is  interesting  to  speculate,  moreover,  as  to  what  would 
have  been  the  nature  of  the  development  in  the  United 
States  had  the  single  tax  principles  been  active.  The 
government  was  interested  in  developing  the  West,  and 
either  gave  the  lands  to  settlers  or  sold  them  at  a  few 
dollars  per  acre.  In  successive  years,  transportation  lines 
would  be  built,  cities  would  develop,  and  the  lands  would 
increase  in  value,  due  to  factors  other  than  the  efforts  of 
the  owner.  Under  the  single  tax  regime  this  increased 
value  would  go  to  the  state.  Had  this  been  the  situation 
there  would  have  been  no  Western  pioneer,  and  develop- 
ment would  have  come  only  as  the  pressure  of  population 
forced  expansion.  The  expected  increase  in  land  values 
was  but  the  remuneration  for  the  hardships  of  pioneering. 
Likewise,  expected  increases  in  land  values  are  often 
figured  as  essential  parts  of  industrial  enterprises.  The 
establishment  of  such  cities  as  Gary  and  Pullman  are 
examples  of  this. 

Society  Responsible  for  Other  Values. — If  socially  created 
land  values  should  be  turned  over  to  the  state,  then  other 
socially  created  values,  if  they  be  found  to  exist,  should 
be  treated  in  a  similar  manner.  A  little  consideration 
will  reveal  the  fact  that  values  of  every  description  are 
more  or  less  the  product  of  society.  Industrial  stocks,  for 
example,  are  valuable  because  society  demands  the  prod- 
ucts of  industry.  One  individual  invests  $10,000  in  land, 
and  another  $10,000  in  sugar  stock.  Society  increases  its 
demand  for  the  product  of  the  land  and  it  becomes  worth 
$15,000 — an  unearned  increment  of  $5,000.  The  demand 
likewise  increases  for  sugar,  and  this  stock  becomes  worth 
$15,000.  One  $5,000  is  just  as  much  an  unearned  incre- 
ment as  the  other. 


370  OUTLINES  OF  PUBLIC  FINANCE 

A  janitor  in  the  Woolworth  Building  receives  $75  per 
month.  He  receives  it  because  the  desires  of  society  have 
demanded  such  a  building,  and  his  job  therefore  is  a  social 
product.  The  demand  for  brick  may  so  increase,  or  the 
clay  become  so  scarce,  that  the  value  of  the  house  on  the 
farm  will  increase  materially  over  its  initial  one.  This  is 
a  social  product  as  much  as  the  increased  land  value.  So 
it  might  be  shown  that  the  unearned  increment  element  is 
coextensive  with  industry,  and  that  society  has  as  just  a 
claim  upon  it  in  one  branch  as  in  any  other. 

Unearned  Decrement. — An  increment,  moreover,  does 
not  always  exist,  but  the  change  in  value  often  takes  the 
form  of  a  decrement.  If  a  socially  created  value  should 
go  to  society,  then  the  converse  should  be  true,  and  so- 
cially created  losses  should  be  given  by  society  to  the  loser. 
Little  has  been  said  of  this  aspect,  yet  when  the  broad 
influence  of  society  upon  values  is  considered,  its  impor- 
tance becomes  one  of  no  little  magnitude.  Farm  values 
have  soared  because  of  the  high  prices  society  has  been 
willing  to  pay  for  farm  products,  yet  society  may  readjust 
the  monetary  system,  lower  prices,  and  destroy  values. 
Legislation  may  repress  an  industry,  and  by  so  doing 
destroy  the  value  of  its  stocks.  A  new  transportation 
system  may  develop,  thereby  lowering  the  former  value 
of  sites.  The  abandoned  New  England  farm  is  a  monu- 
ment to  a  socially  created  loss.  Such  social  losses  are 
continually  being  created  just  as  much  as  social  values, 
and  are  simply  opposite  aspects  of  the  same  phenomenon. 

193.  The  Social  Claims  for  the  Single  Tax  Have  Not 
Been  Proved. — The  contention  that  the  adoption  of  the 
single  tax  would  bring  about  a  social  millennium  is  opti- 
mistic in  the  extreme.  The  basis  for  the  optimism,  how- 
ever, is  difficult  to  discover.  One  claim  for  its  adoption  is 
the  relief  which  will  be  afforded  to  urban  congestion.  It 
is  in  the  large  cities  where  the  agitation  for  the  single  tax 
is  most  aggressive.  It  is  here,  because  a  large  landless 
class  exists,  that  the  land  appears  scarce.  The  adoption 


THE  SINGLE  TAX  371 

of  the  proposed  measure,  however,  would  neither  increase 
the  amount  of  land  nor  decrease  numbers.  It  could  only 
hope  to  force  into  use  lands  which  are  now  idle,  which  in 
the  congested  districts  of  our  large  cities  are  so  small  in 
amount  as  to  be  negligible.  The  claim  cannot  be  made 
that  there  is  a  scarcity  of  land — in  fact,  there  is  abundance 
of  land  in  the  outskirts  of  the  cities,  or  in  the  undeveloped 
West.  The  people  in  the  cities,  however,  do  not  want 
this  land — they  prefer  to  stay  in  the  congested  dis- 
tricts, endure  the  hardships,  and  pay  the  landlord,  rather 
than  accept  the  responsibilities  of  freedom  where  land 
may  be  had.  It  is  largely  a  case  of  preference  of  the  in- 
dividual, and  the  confiscation  of  land  values  would  not 
change  the  preference. 

Low  rents,  high  wages,  increased  production,  and  other 
such  desirable  conditions  depend  upon  factors  which  have 
a  far  greater  significance  than  the  taking  of  land  values 
by  the  state.  It  is  contended  that  the  exemption  of  build- 
ings from  tax  will  cause  a  large  increase  in  construction, 
and  rents  will  automatically  fall.  A  capital  fund  must 
first  be  secured,  however,  and  this  is  not  idly  waiting  for 
buildings  to  be  untaxed.  Neither  is  there  a  fund  waiting 
to  go  into  increased  production  or  higher  wages.  When 
the  fundamental  principles  of  rents  and  production  are 
considered,  it  is  difficult  to  see  how  the  single  tax  program 
could  materially  affect  social  conditions. 

194.  The  Use  of  the  Single  Tax  Would  Reveal  Undesir- 
able Features  and  Difficulties. — The  adoption  of  the  single 
tax  proposal  in  toto  would  mean  the  abolition  of  all  other 
forms  of  taxes,  whether  they  be  primarily  sumptuary  or 
for  revenue  purposes.  It  would  mean  the  abolition  of 
customs  duties  and  excise  taxes,  as  well  as  the  numerous 
regulatory  taxes  and  licenses  imposed  under  the  police 
power.  By  securing  all  revenues  from  land  values,  and 
by  taking  the  whole  of  these,  elasticity,  that  necessary 
element  to  every  effective  revenue  system,  would  be 
totally  destroyed.  The  city,  the  commonwealth,  and  the 


372  OUTLINES  OF  PUBLIC  FINANCE 

nation  must  rely  year  after  year  upon  the  rental  value  of 
land,  whether  it  produce  a  surplus  or  a  deficit.  There 
would  be  no  way  of  increasing  the  tax  rate  or  of  taxing 
new  bases  in  order  to  increase  the  income  to  meet  an 
emergency  such  as  a  war. 

Effect  on  Public  Activities. — The  nature  of  the  state's 
business  under  the  proposed  scheme  would  be  materially 
changed.  Its  expenditures  would  now  have  to  be  gov- 
erned by  its  income,  rather  than  its  income  be  governed 
by  its  expenditures.  This  income,  too,  would  be  subject 
to  wide  and  unforeseen  fluctuations,  so  that  officials  could 
map  out  no  definite  program.  In  years  of  prosperity  the 
income  would  be  large,  while  it  might  be  seriously  reduced 
during  periods  of  industrial  depression.  The  support  of 
all  public  enterprises,  furthermore,  would  be  coming  from 
a  very  small  percentage  of  the  public — those  who  held 
title  to  land.  It  has  always  been  considered  an  unwise 
political  expedient  to  give  one  class  of  individuals  the 
power  to  vote  the  expenditure  of  funds  which  another 
class  has  contributed.  Under  such  circumstances  little 
consideration  is  given  to  the  relative  importance  of  public 
needs,  while  waste  and  extravagance  are  fostered.  The 
plan,  moreover,  seeks  to  overthrow  the  established  prin- 
ciple of  ability  to  pay  as  the  just  basis  for  taxes  and  reverts 
to  the  inadequate  basis  of  benefits  received. 

Administrative  Difficulties. — The  problem  of  adminis- 
tration appears  to  be  practically  insurmountable.  It  is 
the  problem  of  separating  the  value  of  the  bare  land  from 
the  value  of  the  improvements  on,  or  in,  that  land.  The 
problem  applies  both  to  urban  and  rural  communities, 
but  in  a  somewhat  different  way.  Most  city  improve- 
ments are  on  the  land  in  the  form  of  buildings;  improve- 
ments in  the  country  consist  not  only  of  buildings  on  the 
land,  but  of  labor  and  capital  invested  irrevocably  in  the 
land. 

Assume  three  farms  in  different  parts  of  the  country, 
each  having  a  selling  value  of  $300  per  acre  for  the  land. 


THE  SINGLE  TAX  373 

One  piece  is  comparatively  new,  and  has  been  cultivated 
but  little;  another  was  swampy  and  comparatively  worth- 
less until  a  dredge  ditch  was  constructed;  the  other  has 
been  farmed  intensively  for  generations,  and  has  its  pres- 
ent fertility  and  value  only  because  of  scientific  cultiva- 
tion, rotation  of  crops,  and  extensive  fertilization.  The 
attempt  to  assess  land  values  equally  under  the  general 
property  tax  has  proved  so  farcical  that  it  would  seem 
folly  to  attempt  to  separate  the  value  of  the  bare  land 
from  that  of  the  improvements  in  such  cases  as  the  above. 

The  problem  of  valuation  would  not  be  so  hopeless  in 
cities  since  the  improvement  usually  consists  in  a  sepa- 
rable building.  Generally,  however,  no  separate  value 
has  been  placed  upon  the  site  and  the  building  in  making 
sales.  The  entire  increase  in  site  values,  moreover,  often 
does  not  represent  unearned  gains.  The  owner  frequently 
makes  no  allowance  for  building  depreciation,  but  calcu- 
lates that  the  increase  in  the  value  of  the  site  will  offset 
the  depreciation  of  the  building.  Such  situations  but 
magnify  the  difficulty  of  making  assessments  to  deter- 
mine the  value  of  the  bare  land. 

If  the  state  had  been  the  universal  landlord  from  the 
beginning,  and  had  proceeded  to  accurately  measure  and 
collect  the  economic  rent  from  year  to  year,  the  single  tax 
plan  would  involve  no  particular  burden.  The  resulting 
condition  would  be  that  land  would  have  no  selling  value. 
The  insurmountable  difficulties  and  injustices  of  destruc- 
tions of  values  which  have  grown  up  over  a  period  of 
time  appear,  however,  when  it  is  suggested  that  a  social 
group  adopt  the  single  tax  after  the  system  of  private 
property  in  land  has  been  in  vogue  for  several  generations. 

Modifications  of  Single  Tax  Plan. — Because  of  these 
very  evident  obstacles  in  the  way  of  the  adoption  of  the 
single  tax  principles  in  toto,  some  of  the  thorough  single 
taxers  at  heart  have  temporized  somewhat  in  their  prac- 
tical demands.  These  temporizations  must  not  be  con- 
sidered, however,  as  the  single  tax,  but  merely  as  partak- 


374  OUTLINES  OF  PUBLIC  FINANCE 

ing  somewhat  of  the  nature  of  it.  Some  would  allow  other 
taxes  to  remain,  especially  those  used  for  regulatory  pur- 
poses under  the  police  power.  A  few  have  gone  so  far  as 
to  advocate  the  Federal  income  tax — not  that  they  believe 
hi  the  income  tax,  but  that  they  consider  it  better  than 
an  increase  in  the  taxes  on  commodities. 

Many  are  in  favor  of  letting  bygones  be  bygones,  and 
advocate  the  taking  of  future  increases  in  land  values  for 
the  state.  Different  methods  of  collecting  have  been  sug- 
gested, such  as  taking  the  increase  at  the  time  of  sale,  or 
increasing  the  amount  of  tax  at  regular  intervals.  The 
same  difficulties  occur  here  in  determining  what  part  of 
the  increase  in  value  belongs  to  the  bare  land,  and  what 
part  to  the  results  of  labor  on  and  in  the  land.  Moreover, 
if  a  purchaser  of  land  knows  that  when  he  sells  the  land 
all  increased  values  will  be  confiscated,  or  that  the  tax  is 
to  be  increased  gradually,  proper  allowances  will  be  made 
in  the  purchase  price,  and  there  will  be  no  unearned  in- 
crement except  that  which  could  not  be  foreseen. 

This  scheme  of  increased  taxation  could  be  carried  out 
only  through  the  practice  of  deception — the  purchaser 
must  be  made  to  believe  the  tax  will  not  be  levied,  and 
then  the  levy  be  made.  The  separate  assessment  of  land 
and  buildings,  the  placing  of  a  lower  rate  of  tax  on  build- 
ings than  on  land,  and  the  gradual  reduction  of  taxes  on 
buildings,  are  looked  upon  favorably  by  single  tax  enthu- 
siasts as  being  possible  entering  wedges  for  the  broader 
program. 

Apportionment  of  Revenue. — One  other  difficulty  de- 
serves to  be  mentioned;  that  is,  the  apportionment  of 
revenue.  All  the  revenues  of  the  various  political  units 
are  to  come  from  the  single  source — land.  Upon  what 
basis  shall  it  be  decided  how  much  shall  go  to  the  Federal 
government,  to  the  states,  to  the  counties,  cities,  town- 
ships, and  school  districts?  On  the  basis  of  the  claim  that 
this  revenue  belongs  to  society  since  it  has  been  created 
by  society,  it  would  seem  just  and  logical  that  th§  revenue 


THE  SINGLE  TAX  375 

should  be  distributed  to  the  parts  of  society  which  have 
been  instrumental  in  causing  its  accumulation.  The  dif- 
ficulty which  one  would  encounter  in  attempting  to  dis- 
tribute the  annual  rental  from  the  Woolworth  site  on  such 
a  basis  is  easily  apparent. 

195.  The  Burden  of  the  Single  Tax  Would  Be  Most 
Severely  Felt  by  Rural  Districts. — Much  discussion  has 
been  carried  on  as  to  what  effect  the  adoption  of  a  tax  on 
land  values  to  secure  the  amount  of  revenue  which  is 
now  needed  would  have  in  changing  the  tax  burden,  par- 
ticularly as  between  rural  and  urban  communities.  It 
has  been  set  forth  by  its  advocates,  in  order  to  win  the 
rural  population  to  its  support,  that  rural  communities 
under  such  a  system  of  taxation  would  pay  proportion- 
ately less  taxes  than  at  present.  In  some  cases  this  might 
be  true,  but  a  little  calculation  should  convince  one  that, 
as  a  general  proposition,  the  opposite  situation  will  prevail. 

Comparison  of  Rural  and  Urban  Values. — The  enormous 
land  values  of  the  city  are  pictured — a  block  in  the  loop 
district  in  Chicago,  for  example — and  then  the  insignifi- 
cant value  of  an  acre  of  farm  land  is  offered  hi  compari- 
son. The  deceitfulness  in  such  a  portrayal  lies  in  the  fact 
that  the  total  value  of  all  the  agricultural  land  in  an  assess- 
ment district  is  not  compared  with  the  total  value  of  all 
city  lots.  If  this  be  done  it  will  be  found  that  in  most 
cases  agricultural  land  values  exceed  the  values  of  city 
lands.  The  other  aspect  of  vital  importance  is  the  pro- 
portion which  the  value  of  other  assessable  property  bears 
to  the  value  of  land  in  each  case.  In  general,  the  propor- 
tion is  much  higher  in  cities  than  in  the  country.  When 
these  two  features  are  taken  into  consideration,  the  con- 
clusion inevitably  follows  that,  if  land  values  were  made 
to  shoulder  the  entire  tax  burden,  a  larger  proportionate 
amount  would  be  exacted  from  the  rural  districts  than 
before  the  inauguration  of  the  plan. 

Suppose  an  agricultural  section  and  a  city  in  the  same 
taxing  district.  The  assessed  value  of  the  rural  land  has 


376  OUTLINES  OF  PUBLIC  FINANCE 

been  $5,000,000  and  the  assessment  of  other  rural  prop- 
erty $2,000,000.  In  the  city  the  assessed  value  of  the 
land  has  been  $4,000,000,  and  of  other  property,  $3,000,- 
000.  The  total  tax  collected  has  been  $200,000,  shared 
equally  between  city  and  country  because  the  assessment 
was  the  same.  With  the  exemption  of  all  but  land  values 
this  equality  is  disturbed,  and  more  than  half  the  amount 
will  be  assessed  against  the  rural  communities. 

While  it  is  the  predominating  condition  generally,  in 
agricultural  communities,  that  the  value  of  land  exceeds 
the  value  of  other  property,  exceptions  are  not  hard  to 
find.  In  some  of  the  poorer  communities  land  serves  but 
little  purpose,  as  in  some  of  the  states  of  the  Southwest, 
or  among  the  abandoned  farms  of  New  England.  Here  a 
large  part  of  the  taxable  property  consists  of  other  than 
land,  and  the  effect  of  adopting  the  single  tax  on  land 
values  would  be  tragic.  Officials  would  be  confronted 
with  the  task  of  extracting  revenues  from  a  source  which 
had  a  bare  existence. 

The  Individual  Owner. — The  aggregate  relation  between 
land  values  and  other  values  becomes  the  concern  of  the 
individual  property  owner  when  it  is  suggested  to  make 
the  land  the  sole  basis  of  taxes.  Suppose  the  aggregate 
relation  is  50  per  cent  land  values,  and  50  per  cent  a  prop- 
erty valuation,  which  is  to  be  discarded.  An  individual 
whose  property  was  made  up  of  these  proportions  would 
find  no  difference  in  his  tax  burden;  one  whose  land 
represented  75  per  cent,  and  other  property  25  per  cent 
of  the  total  value,  would  be  the  loser  by  the  change;  one 
whose  land  was  25  per  cent  of  his  total  property,  and  other 
property  75  per  cent,  would  be  the  gainer.  A  few  years 
ago,  when  there  was  agitation  for  the  untaxing  of  build- 
ings in  New  York  City,  the  land  values  of  Manhattan 
represented  64  per  cent  of  the  total,  and  buildings  34  per 
cent.  Consequently,  only  persons  who  had  land  worth 
more  than  64  per  cent  of  the  building  on  it  would  have 
lost  by  the  change. 


THE  SINGLE  TAX  377 

196.  Various  Tactics  Have  Been  Employed  in  Propagat- 
ing the  Single  Tax. — Many  direct  attempts  have  been 
made  to  secure  the  adoption  of  the  single  tax  program, 
while  many  of  the  attempts  have  been  indirect  and  con- 
cealed. The  use  of  political  campaigns,  legislative  action, 
and  general  education  to  the  principles  have  been  most 
employed.  The  followers  of  Henry  George  have  not 
always  held  the  same  opinion  as  to  the  most  successful 
method  of  propaganda,  nor  was  Mr.  George  always  of  the 
same  mind.  The  scheme  which  has  had  the  most  promise 
of  success  at  a  particular  time  and  place  has  been  the  one 
generally  used. 

Early  Propaganda. — -The  first  active  campaign  for  the 
adoption  of  the  principles  of  Progress  and  Poverty  was 
staged  by  Mr.  George  in  the  political  campaign  for  the 
election  of  Mayor  of  New  York  City  in  1886.  His  book 
had  had  a  wide  reading  among  the  laboring  classes,  and 
he  had  come  to  be  looked  upon  as  the  champion  of  the 
oppressed  and  downtrodden.  He  was  chosen  as  the  peo- 
ple's candidate  for  mayor,  after  he  had  refused  to  accept 
the  nomination  unless  thirty  thousand  signatures  could 
be  obtained  in  favor  of  his  making  the  race.  The  issues 
of  the  campaign  were  clear-cut,  and  while  Mr.  George 
and  his  principles  were  defeated,  the  magnitude  of  the 
vote  which  they  commanded  indicates  what  a  hold  they 
had  gained  upon  the  people.  Mr.  George  received  68,100 
votes,  while  the  other  candidates,  Mr.  Hewitt  and  Mr. 
Roosevelt,  received  90,552  and  60,435,  respectively.  En- 
couraged by  the  large  vote,  candidates  were  entered  hi 
future  campaigns,  both  in  state  and  in  city  elections,  and 
at  times  the  principles  have  entered  actively  into  national 
political  campaigns.  Mr.  George  again  entered  the  New 
York  City  mayoralty  race  in  1897,  but  died  a  few  days 
before  the  election.  Death  was  no  doubt  due  to  over- 
exertion  during  the  campaign. 

Educational  Campaign. — The  basis  for  a  general  educa- 
tional campaign  lies  in  the  gifts  of  persons  of  means  who 


378  OUTLINES  OF  PUBLIC  FINANCE 

have  been  interested  in  the  movement.  The  most  im- 
portant provision  for  the  educational  work  is  the  Joseph 
Fels  Fund,  started  by  Joseph  Fels — a  rich  soap  manufac- 
turer of  Cincinnati.  He  created  funds,  not  only  in  the 
United  States,  but  in  various  other  countries,  offering  to 
match  every  dollar  up  to  certain  amounts  that  others 
might  contribute.  From  the  resources  thus  provided, 
much  literature  has  been  distributed,  and  the  financing  of 
many  campaigns  has  been  made  possible.  A  number  of 
periodicals  have  been  established  which  are  devoted  to 
the  dissemination  of  single  tax  principles. 

Legislative  Attempts. — In  recent  years  much  effort,  tune, 
and  money  have  been  spent  in  attempting  to  secure  legis- 
lation, which,  while  it  has  not  been  directly  single  tax 
proposals,  will  form  an  entering  wedge  for  the  adoption 
of  the  principles.  Movements  to  secure  the  initiative 
and  referendum  have  been  actively  supported  by  those 
who  are  interested  in  the  development  of  the  single  tax. 
Much  money  from  the  Fels  Fund  has  been  spent  to  secure 
the  adoption  of  these  principles  in  different  states.  Where 
the  initiative  exists,  the  opportunity  for  conducting  cam- 
paigns through  the  circulation  of  petitions  is  made  pos- 
sible, and  the  way  is  opened  for  more  extensive  educa- 
tional operations.  All  propositions  which  have  for  their 
end  the  separate  assessment  of  land  and  buildings  have 
of  course  had  the  active  indorsement  of  all  single  tax 
enthusiasts.  Such  assessments  bring  into  closer  review 
the  so-called  unearned  land  values. 

Attempt  to  Secure  Local  Option. — The  proposition  which 
has  been  most  heartily  supported  when  it  has  come  before 
the  legislative  body,  and  the  one  whose  adoption  the 
single  taxers  have  labored  most  strenuously  to  secure,  is 
what  is  generally  called  home  rule,  or  local  option,  in 
taxation.  It  is  the  proposal  to  allow  the  various  political 
units  to  be  self-determining  on  matters  of  taxation.  The 
belief  is  held  that,  if  this  be  secured,  some  districts  would 
decide  to  adopt  the  single  tax  principles,  and  that  others 


THE  SINGLE  TAX  379 

would  then  be  impelled  or  compelled  to  follow  their  ex- 
ample. In  some  of  the  campaigns  for  securing  this  prin- 
ciple, the  propaganda  has  been  openly  of  a  single  tax 
nature,  while  in  others  there  has  been  an  attempt  at 
the  concealment  of  this  aspect.  The  method  which 
seemed  to  indicate  the  most  favorable  results  has  usually 
been  followed.  The  end  and  not  the  means  has  seemed 
to  be  the  important  consideration  in  most  single  tax 
campaigns.  It  is  the  consensus  of  opinion  that  most  of 
the  campaigns  would  not  have  been  waged  had  it  not 
been  for  single  tax  influences. 

Aside  from  the  legislative  activities,  the  single  tax  en- 
thusiasts are  becoming  more  active  in  putting  candidates 
in  the  political  campaigns.  In  some  states  the  Single  Tax 
Party  has  become  a  force  of  considerable  strength.  The 
fact  that  a  National  single  tax  ticket  appeared  on  the 
ballots  hi  the  November,  1920,  election,  is  evidence  that 
the  political  ambitions  are  not  local  in  scope. 

A  number  of  single  tax  clubs  and  organizations  scat- 
tered over  the  country  continually  attempt  to  scatter 
single  tax  influences.  These  organizations,  moreover, 
keep  alert  to  any  political  or  economic  conditions  which 
will  favor  the  adoption  of  their  principles.  Lecture  bu- 
reaus have  been  established  to  place  speakers  before  in- 
fluential meetings.  Many  novel  schemes  of  advertising 
have  been  used  at  various  times.  As  a  whole,  the  move- 
ment can  be  characterized  as  one  of  active  propaganda 
from  the  beginning. 

197.  The  Single  Tax  Campaign  in  Oregon  Did  Not 
Show  Substantial  Results. — When  Joseph  Fels  established 
his  fund  for  single  tax  propaganda,  it  was  his  purpose  to 
have  the  single  tax  in  actual  operation  somewhere  in  the 
United  States  within  five  years,  and  to  this  end  the  com- 
mission hi  charge  of  the  fund  began  operations.  Because 
the  state  of  Oregon  presented  the  most  fruitful  prospects, 
all  efforts  were  concentrated  there  for  the  time  being. 
Because  of  the  strenuous  fight  which  was  waged,  and  the 


380  OUTLINES  OF  PUBLIC  FINANCE 

methods  which  were  used,  a  somewhat  detailed  account 
of  the  contest  will  not  be  out  of  place,  even  in  a  book  of 
this  nature. 

The  factor  which  led  the  Fels  Fund  Commission  to 
choose  Oregon  as  its  base  of  operations  was  the  fact  that 
a  substantial  single  tax  interest  was  already  manifest 
there.  Through  an  initiative  petition  the  single  tax  work- 
ers succeeded  in  submitting  a  constitutional  amendment 
to  popular  vote  in  1908.  The  amendment,  to  a  large  ex- 
tent, embodied  single  tax  principles,  and  the  campaign 
was  openly  a  single  tax  one.  The  amendment  did  not 
carry,  but  the  vote  in  its  favor  was  so  large  that  its  sup- 
porters were  encouraged  to  look  for  victory  in  the  not  far 
distant  future.  An  interesting  feature  of  the  vote,  espe- 
cially to  those  who  supported  the  measure,  was  that  the 
county  in  which  Portland  is  located  almost  rendered  an 
affirmative  decision. 

Struggle  for  Local  Option. — From  the  indications  of  the 
vote  on  this  amendment,  it  seemed  likely  that  the  single 
tax  could  be  installed  in  some  of  the  counties  if  by  some 
means  county  local  option  could  be  secured  in  Oregon. 
In  1910,  therefore,  the  following  amendment  was  pre- 
sented to  the  voters: 

No  poll  or  head  tax  shall  be  levied  or  collected  in  Oregon;  no  bill 
regulating  taxation  or  exemption  throughout  the  state  shall  become  a 
law  until  approved  by  the  people  of  the  state  at  a  regular  general  elec- 
tion; none  of  the  restrictions  of  the  Constitution  shall  apply  to  meas- 
ures approved  by  the  people  declaring  what  shall  be  subject  to  taxa- 
tion and  exemption  and  how  it  shall  be  taxed  or  exempted,  whether 
proposed  by  the  Legislative  Assembly  or  by  initiative  petition;  but 
the  people  of  the  several  counties  are  hereby  empowered  and  author- 
ized to  regulate  taxation  and  exemptions  within  their  several  counties, 
subject  to  any  general  law  which  may  be  hereafter  enacted.1 

Unlike  the  previous  campaign,  the  contest  over  this 
amendment  was  not  carried  through  on  a  single  tax  basis. 
The  single  tax  nature  was  kept  in  the  background,  while 

of  Oregon  Board  of  State  Tax  Commissioners,  1911. 


THE  SINGLE  TAX  381 

the  amendment  and  its  title  were  worded  so  as  to  appeal 
to  a  large  constituency.  The  poll  tax  feature,  for  exam- 
ple, attracted  many  voters  because  of  the  general  dis- 
tastefulness  of  these  taxes.  The  result  was  that  the 
amendment  carried  by  a  small  majority. 

The  adoption  of  this  amendment  but  marked  the  be- 
ginning of  the  real  single  tax  fight.  The  opponents  of 
the  measure  arose  in  disgust  and  declared  the  people  had 
been  fooled  and  hoodwinked.  The  victors  became  radiant, 
threw  off  their  cloak  of  disguise,  and  exultingly  declared 
it  was  the  greatest  victory  that  had  ever  been  won  for 
the  single  tax  principles.  They  immediately  announced 
the  single  tax  as  the  leading  issue  of  the  next  election. 
Under  the  local  option  amendment,  measures  were  brought 
forth  in  three  counties  to  exempt  all  improvements  and 
personal  property  from  taxation.  A  state  single  tax  meas- 
ure was  also  submitted.  A  furious  bombardment  of  lit- 
erature and  speeches  came  from  both  contending  forces. 
When  the  polls  finally  gave  the  results  of  the  battle  it 
was  found  that  the  amendments  had  been  overwhelmingly 
defeated.  A  few  other  attempts  have  been  made  at  amend- 
ments, but  they  were  defeated  until  1918,  when  the  State 
Tax  Commission  succeeded  in  getting  some  changes  sub- 
mitted and  adopted.  Provision  is  made  for  uniformity  of 
taxation,  and  for  the  levying  and  collection  of  taxes  under 
general  laws  which  are  to  operate  uniformly  throughout 
the  state. 

198.  The  Advocates  of  the  Single  Tax  Have  Been  Active 
in  Other  States. — While  one  of  the  most  important  battles 
for  the  single  tax  was  staged  in  Oregon,  much  activity  has 
been  found  in  other  states.  Campaigns  of  more  or  less 
intensity  have  been  carried  on  in  some  of  the  other  Western 
states,  principally  Washington,  California,  Colorado,  and 
Missouri.  Much  the  same  tactics  have  been  used  as  in  the 
Oregon  campaigns,  with  the  same  general  results.  Seattle 
voted  down  the  proposition  on  two  successive  occasions. 
The  city  of  Everett,  on  the  other  hand,  voted  in  favor  of 


382  OUTLINES  OF  PUBLIC  FINANCE 

its  adoption.  The  State  Tax  Commission  of  Washington, 
however,  ruled  such  a  proposition  to  be  unconstitutional, 
and  the  ruling  has  never  been  questioned. 

The  propaganda  for  single  tax  adoption  has  been  carried 
on  somewhat  extensively  among  cities  of  Colorado,  since 
they  are  granted  a  large  measure  of  home  rule.  In  only 
one  case  has  a  favorable  vote  been  secured.  This  was  in 
the  city  of  Pueblo,  but  before  the  measure  had  a  chance 
to  work  itself  out  it  was  repealed.  The  people  of  Cali- 
fornia, through  an  initiative  petition,  voted  upon  a  single 
tax  amendment  in  1916,  and  definitely  refused  to  adopt 
it.  Somewhat  earlier  a  strenuous  campaign  was  staged  in 
Missouri  to  secure  the  adoption  of  a  state  single  tax 
amendment.  Here,  again,  an  attempt  was  made  to  con- 
ceal the  identity  of  the  propagators.  The  opposition  was 
not  to  be  deceived,  and  directed  a  vigorous  anti-single  tax 
campaign.  The  result  was  an  overwhelming  defeat  of  the 
proposal. 

Situation  in  Eastern  States. — The  economic  conditions 
in  the  Eastern  states  differ  somewhat  from  the  conditions 
in  the  Western  states,  consequently  the  methods  used  in 
propagating  the  single  tax  have  not  always  been  the  same. 
The  state  of  New  York  has  always  been  the  source  of 
much  agitation.  Some  of  the  so-called  tax  reform  asso- 
ciations have  been  active  for  a  number  of  years  in  at- 
tempting to  secure  legislation  favorable  to  the  single  tax 
creed.  The  separate  assessment  of  land  and  buildings  has 
been  secured,  while  repeated  attempts  have  been  made  to 
secure  a  reduction  of  the  assessment  on  buildings.  So 
far  the  legislature  has  turned  a  deaf  ear  to  such  appeals. 

The  legislature  of  Pennsylvania  has  the  distinction  of 
first  authorizing  a  reduction  of  the  assessment  on  build- 
ings. In  1913,  it  provided  for  a  gradual  decrease  of  build- 
ing assessments  for  cities  of  the  second  class — Scranton 
and  Pittsburg — until  by  1925  the  rate  was  to  be  50  per 
cent  of  that  on  land.  Two  years  later  the  law  was  re- 
pealed, but  the  repeal  was  vetoed  by  the  Governor  on  the 


THE  SINGLE  TAX  383 

ground  that  there  was  so  much  conflict  of  opinion,  and 
that  the  law  had  not  been  tried  a  sufficient  length  of  time 
to  prove  its  merits  or  defects.  The  law  continues  to  be 
in  force,  and  the  deductions  in  assessment  are  being  made 
as  provided  for. 

Many  other  examples  might  be  given  of  the  activities  of 
these  disciples  of  the  taxation  of  land  values.  In  some 
states,  especially  in  New  York,  preparations  are  being 
made  for  waging  still  more  aggressive  campaigns.  The 
failure  to  have  accomplished  any  material  results  in  the 
past  has  but  spurred  the  leaders  to  greater  activity.  One 
other  enterprise,  somewhat  different  from  the  undertak- 
ings which  have  been  discussed  in  the  preceding  para- 
graphs, deserves  brief  consideration.  This  is  the  Fair- 
hope  single  tax  colony,  which  is  often  pointed  out  as  the 
blueprint  of  the  single  tax  ideal. 

The  Fairhope  Colony. — The  holdings  of  the  Fairhope 
Single  Tax  Corporation  consist  of  several  thousand  acres 
of  land  located  in  Alabama.  The  members  in  the  asso- 
ciation attain  this  privilege  by  the  payment  of  a  fee,  and 
then  lease  the  village  site  or  farm  land  from  the  corpora- 
tion. The  lease  price  is  determined  by  the  differential 
advantage  of  the  site,  or  land.  No  other  taxes  are  col- 
lected upon  the  buildings  and  improvements.  In  spite  of 
criticisms  which  have  arisen  from  some  of  the  members, 
the  project  seems  to  have  prospered.  Perhaps,  however,  it 
would  have  developed  under  other  systems  of  ownership 
and  taxes.  Henry  George  would  attach  little  importance 
to  any  success  which  it  might  claim,  because  he  did  not 
believe  the  single  tax  could  be  fairly  tried  on  a  small  scale 
in  districts  where  other  fiscal  systems  prevailed. 

199.  The  Single  Tax  Has  Found  Adherents  Outside  the 
United  States. — The  single  tax  movement  has  not  been 
confined  to  the  United  States.  In  fact,  when  adherents  of 
the  proposal  wish  to  cite  examples  of  its  successful  opera- 
tion, they  invariably  choose  them  from  the  cities  and  prov- 
inces of  western  Canada.  In  a  number  of  these  towns  and 


384  OUTLINES  OF  PUBLIC  FINANCE 

cities  land  has  been  practically  the  sole  object  of  taxation, 
and  under  the  system  the  country,  towns,  and  cities  grew 
and  prospered.  Land  values  rose  rapidly,  the  taxes  were 
comparatively  low,  and  the  burden  of  providing  for  the 
needs  of  the  public  purse  was  scarcely  felt.  The  cities  of 
the  United  States,  especially  in  the  West,  have  been 
urged,  if  they  would  be  prosperous,  to  throw  off  the  octo- 
pus of  taxing  improvements  and  adopt  the  system  used 
by  Vancouver  or  Edmonton. 

Situation  in  Canada. — Present  reports  from  experts  who 
have  made  a  study  of  the  situation,  and  from  the  officials 
themselves,  indicate  that  the  tax  system  in  these  Cana- 
dian cities  is  becoming  far  from  satisfactory.  Land  values 
are  ceasing  to  rise  in  the  accustomed  ratio,  which  auto- 
matically affects  revenues.  The  justice  of  exempting  rich 
brokers,  bankers,  and  merchants  from  taxes  is  being 
questioned  by  an  increasing  number  of  citizens.  An  offi- 
cial of  the  city  of  Edmonton  has  just  pointed  out  the  fact 
that  when  land  values  are  rising  rapidly,  and  taxes  are 
low,  the  system  works  admirably;  but  that  now  land 
values  are  not  increasing,  while  the  need  for  revenue  is 
increasing.  Other  sources  of  revenue  must  be  found  or 
the  taxes  on  land  will  become  unbearable. 

A  few  figures  will  indicate  the  present  condition  of  Van- 
couver's prosperity  when  land  values  cease  to  rise  rapidly. 
In  1912  building  permits  reached  over  $19,000,000,  but 
in  a  few  years  had  fallen  to  less  than  $2,500,000.  Tax 
arrears  were  about  $510,000  in  1912,  $4,220,000  in  1916, 
and  $5,038,000  in  1918.  The  mill  tax  rate  has  gone  up 
from  about  16  to  nearly  25.  The  debt  has  gone  from 
$22,500,000  in  1912  to  $40,000,000  in  1918.1  In  a  number 
of  cities  the  rate  is  being  increased  to  such  an  extent  that 
refusal  to  pay  the  tax  is  the  result,  and  numerous  lots  are 
being  taken  over  in  payment  for  taxes.  It  has  been 
pointed  out  by  many  observers  that  these  conditions  do 
not  prevail  in  the  eastern  cities,  which  have  not  been 

1 F,  C.  Wade,  Bulletin  of  National  Tax  Association,  April,  1918, 


THE  SINGLE  TAX  385 

affected  by  the  magic  of  the  single  tax.  It  is  significant 
that,  in  a  recent  Ottawa  municipal  election,  the  proposi- 
tion to  adopt  the  single  tax  as  a  basis  for  her  revenue 
system  was  defeated  by  a  three  to  one  vote. 

It  is  becoming  increasingly  evident  that  the  claims  that 
have  been  made  for  the  tax  system  of  western  Canada 
can  no  longer  be  substantiated.  A  marked  dissatisfaction 
with  the  system  is  becoming  more  apparent.  Marked 
ability  to  pay  taxes  is  seen  among  the  class  of  bankers, 
merchants,  and  manufacturers,  yet  they  frequently  escape 
almost  entirely.  Demands  are  being  made  that  these 
classes,  who  are  enjoying  the  benefits  of  the  government, 
contribute  to  its  support,  and  future  fiscal  development 
may  be  expected  to  take  the  direction  of  an  extension  of 
the  bases  for  the  levy  of  taxes. 

The  Principle  in  Europe. — Some  of  the  principles  of  the 
single  tax  may  be  found  in  use  hi  some  European  and 
Asiatic  countries,  yet  these  features  have  no  place  as  a 
part  of  the  Henry  George  single  tax  movement.  The 
Lloyd  George  scheme  for  land  taxes  of  1909  has  been 
pointed  out  as  a  single  tax  achievement.  In  reality  it 
was  simply  a  plan  to  secure  some  return  from  the  vast 
estates  which  were  being  held  tax-free,  since  taxes  had 
been  assessed  upon  the  annual  rental  instead  of  upon 
capital  value.  The  unearned  increment  tax  has  been  used 
extensively,  however,  in  Germany  and  Australia. 

200.  The  Single  Tax  Agitation  Has  Emphasized  Defects 
in  Our  Fiscal  System. — Most  economists  and  fiscal  au- 
thorities condemn  the  theoretical  and  practical  principles 
of  the  single  tax,  yet  none  will  deny  that  the  agitation  has 
served  to  emphasize  some  of  the  defects  of  our  fiscal  sys- 
tem. The  evils  and  discrepancies  of  general  property 
taxes  have  been  forcefully  portrayed.  Examples  are  not 
infrequent  of  where  the  low  assessment  of  unoccupied 
lands  and  sites  has  been  a  factor  in  stimulating  specula- 
tion. It  has  been  shown,  too,  that  increased  values  and 
abilities  have  arisen,  and  that  they  have  not  been  made 


386  OUTLINES  OF  PUBLIC  FINANCE 

to  bear  their  fair  share  of  the  tax  burden.  Such  portrayals 
should  inspire  the  authorities  to  reach  these  sources 
through  more  accurate  valuations,  and  to  make  exactions 
from  property  when  its  ability  to  bear  tax  burdens  be- 
cause of  the  action  of  society  can  be  actually  measured. 
Much  can  be  done  to  eliminate  the  evils  which  the  single 
taxers  portray,  however,  without  the  confiscation  of  land 
values. 

ADDITIONAL   READING 

Seligman,  Essays  in  Taxation,  chap.  iii. 
Young,  Single  Tax  Movement  in  the  United  States. 
Carver,  Essays  in  Social  Justice,  chap.  xi. 
Proceedings  of  the  National  Tax  Association,  1914,  pp. 
405-465;  1917,  pp.  375-381. 


CHAPTER  XVII 

PUBLIC   INDEBTEDNESS 

201.  Indebtedness  Is  Characteristic  of  Modern  Fiscal 
Systems. — In  the  early  existence  of  governments,  borrow- 
ing was  looked  upon  as  an  extraordinary  means  of  secur- 
ing revenue.  This  method  was  to  be  employed  when  all 
others  failed,  or  when  the  need  was  occasioned  by  an 
emergency,  such  as  war  or  pestilence,  and  the  ordinary 
sources  of  revenue  were  inadequate  to  meet  such  sudden 
demands.  In  some  of  the  earlier  states,  moreover,  there 
was  no  need,  even  in  cases  of  emergency,  for  the  use  of 
public  credit.  As  need  arose,  the  state  simply  demanded 
more  services  from  its  citizenship,  or  extended  its  power 
to  confiscate  any  commodities  of  which  it  might  be  in 
need.  As  the  state  evolved  from  this  condition  of  direct 
appropriation  of  materials  and  services,  and  as  constitu- 
tional government  gradually  took  on  more  definite  form, 
the  institution  of  public  credit  gradually  became  more 
prominent. 

The  present  widespread  use  of  public  borrowing  was 
reached  only  after  a  long  and  slow  development.  Its 
history  would  not  be  the  same  in  all  states.  In  most  of 
the  older  states  it  developed  with  the  growth  and  remodel- 
ing of  fiscal  systems,  while  some  of  the  newer  states,  in 
imitation  of  the  already  established  governments,  have 
used  their  credit  as  a  source  of  revenue  from  the  start. 
Whatever  the  development,  the  institution  of  borrowing 
has  assumed  a  place  of  such  importance  in  modern  fiscal 
systems,  that  few  governmental  units  can  be  found  which 
do  not  practice  the  policy  of  deficit  financiering.  This 


388  OUTLINES  OF  PUBLIC  FINANCE 

condition  not  only  applies  to  national  units  of  both  mo- 
narchical and  democratic  types,  but  to  the  minor  political 
units,  such  as  the  commonwealth,  county,  and  munici- 
pality. 

Money  Market  Necessary. — Before  public  borrowing  can 
be  successfully  carried  out,  a  money  market  must  be  in 
existence,  and  public  credit  must  be  established.  It  is 
evident  that  before  a  government  can  borrow  money,  the 
people  of  that  government,  or  some  other,  must  have 
money  to  loan — that  is,  there  must  be  a  money  market  in 
existence.  Since  a  money  market  is  characteristic  of  a 
people  of  somewhat  intense  commercial  life,  it  naturally 
follows  that  public  borrowing  can  develop  only  in  coun- 
tries whose  citizenship  is  of  the  commercial  type. 

It  already  has  been  indicated  that,  among  early  states, 
a  new  prince  or  ruler  frequently  repudiated  the  debts  of 
his  predecessor.  Under  such  conditions  the  institution  of 
public  credit  was  indeed  weak,  while  the  loans  of  the 
individuals  were  frequently  of  an  involuntary  nature.  It 
was  only  with  the  development  of  constitutional  govern- 
ment, wherein  the  citizenship  gained  control  over  the 
affairs  of  the  government,  that  guarantees  began  to  be 
made  against  repudiation.  With  these  guarantees  public 
credit  grew  stronger  and  public  debts  grew  apace. 

The  Republic  of  Venice  is  usually  credited  with  having 
inaugurated  successfully  the  policy  of  public  borrowing. 
England  did  not  use  it  until  the  time  of  William  III.  At 
present,  however,  a  political  unit  which  is  free  from  debt 
is  very  exceptional.  Many  of  the  debts,  indeed,  are  of 
such  magnitude  that  the  meeting  of  the  interest  charge 
entails  such  an  enormous  burden  upon  the  citizenship 
that  any  effort  to  pay  off  the  principal  seems  out  of  the 
question. 

Failure  of  a  Reserve  Fund. — The  policy  of  public  borrow- 
ing has  not  always  received  the  sanction  of  students  of 
fiscal  problems.  In  the  earlier  stages  of  political  develop- 
ment the  maintenance  of  a  reserve  fund,  or  "war  chest/' 


PUBLIC  INDEBTEDNESS  389 

as  it  was  called,  was  looked  upon  as  the  most  feasible 
method  for  meeting  an  emergency.  This  was  gradually 
abandoned  until,  in  recent  years,  Germany  has  been  the 
only  important  state  which  still  followed  this  policy. 

The  maintenance  of  a  reserve  fund  by  the  state  received 
the  sanction  of  early  fiscal  authorities  because  it  appeared 
that  this  was  the  only  way  to  relieve  the  state  from 
financial  embarrassment  in  time  of  emergency.  Subse- 
quent developments,  however,  have  led  to  the  almost 
total  abandonment  of  the  policy.  One  reason  for  its  fail- 
ure has  been  the  inability  of  a  state  to  acquire  and  main- 
tain a  reserve  of  sufficient  size  to  meet  the  need  which 
modern  emergencies  impose.  The  insignificance  of  Ger- 
many's war  chest  of  $30,000,000  is  apparent  when  the 
total  of  her  war  expenditures  are  calculated.  To  secure 
and  maintain  a  fund  sufficient  to  meet  such  an  emergency 
expenditure  as  the  Great  War  entailed  upon  its  partici- 
pants, would  require  sacrifices  which  no  citizenship  would 
be  willing  to  endure. 

The  time  and  occasion  for  the  use  of  the  reserve  fund, 
moreover,  are  uncertain,  and  individuals  discount  the 
future  to  such  an  extent  that  they  are  unwilling  to  make 
any  great  sacrifice  hi  the  present  to  meet  a  remote  and 
uncertain  need.  The  subtracting  of  a  large  amount  of 
gold  from  the  monetary  supply  of  the  country,  if  the 
reserve  be  kept  in  this  form,  must  curtail  commercial 
and  industrial  development,  and  thus  lessen  the  patri- 
mony of  the  state.  If  the  state  keep  its  reserve  in  the  form 
of  securities,  it  constantly  faces  the  danger  of  having  to 
dispose  of  them  in  a  poor  market,  while  an  element  of 
instability  is  introduced  in  the  market  for  securities  be- 
cause of  the  possibility  of  the  state  unloading  its  holdings 
at  any  time. 

The  modern  state,  hi  order  to  meet  not  only  extraor- 
dinary expenditures,  but  frequently  ordinary  ones,  enters 
the  money  market  alongside  individuals,  and  bids  for  the 
use  of  capital.  National,  state,  and  municipal  bonds  are 


390  OUTLINES  OF  PUBLIC  FINANCE 

so  extensively  used  in  modern  fiscal  systems  that  they 
are  accepted,  without  question,  as  an  ordinary  occurrence. 
One  needs  but  to  glance  over  the  list  of  securities  which 
leading  banking  and  brokerage  houses  offer,  to  see  the 
importance  of  the  role  which  the  various  forms  of  public 
evidences  of  indebtedness  play  in  our  modern  security 
markets. 

202.  All  Aspects  of  Public  and  Private  Debts  Are  Not 
the  Same. — While  public  borrowing  in  general  partakes 
of  the  nature  of  private  indebtedness,  yet  in  some  respects 
differences  may  occur.  In  both  cases  some  form  of  credit 
must  be  established,  and  a  source  of  loanable  funds  must 
be  in  existence.  One  important  difference,  however,  is 
the  sovereignty  of  the  state.  Because  of  this  sovereignty 
the  state  cannot  be  compelled  to  fulfill  any  contract  it 
has  made.  In  the  United  States,  for  example,  no  common- 
wealth can  be  sued  by  an  individual  without  its  consent. 
Hence,  if  a  state  should  wish  to  repudiate  a  debt,  as  has 
been  frequently  done,  the  creditor  has  no  redress. 

In  the  case  of  states,  then,  there  is  no  political  or  legal 
method  of  enforcing  the  fulfillment  of  contract.  As  a 
matter  of  fact,  however,  there  does  exist  a  strong  eco- 
nomic force  which  acts  as  a  compelling  motive  to  the 
keeping  of  obligations.  The  fear  of  the  inability  to  place 
future  contracts  in  a  satisfactory  manner  compels  the 
state  to  be  cautious  about  violating  present  contracts. 
The  old  adage  that  "the  truth  itself  is  not  believed  from 
one  who  often  has  deceived,"  has  a  public  as  well  as  an 
individual  significance.  The  fact  that  states  were  slow  to 
recognize  this  accounts,  in  large  part,  for  the  slow  develop- 
ment of  public  credit. 

Payment  of  Public  Debts. — Public  borrowing  differs 
from  private,  also,  in  the  purposes  for  which  it  may  be 
undertaken,  and  in  the  basis  for  the  payment  of  the  in- 
terest and  principal.  In  modern  private  borrowing  the 
great  majority  is  for  commercial  enterprises  of  a  produc- 
tive nature.  As  long  as  borrowing  was  for  consumptive 


PUBLIC  INDEBTEDNESS  391 

purposes,  ecclesiastical  as  well  as  political  authorities  for- 
bade the  exaction  of  interest  on  the  ground  that  the  bor- 
rowed capital  did  not  create  any  ability  to  meet  an  inter- 
est charge.  The  devices  which  were  used  to  evade  these 
restrictive  measures  when  capital  came  to  be  demanded 
for  productive  purposes  soon  led  to  the  legalizing  of  in- 
terest payments.  A  large  part  of  borrowed  capital,  then, 
because  of  the  productive  uses  to  which  it  is  put,  has  in 
itself  the  ability  to  meet  the  interest  charge,  and  perhaps 
in  time  even  to  provide  for  the  repayment  of  the  principal. 
There  is  a  mutual  gain — the  creditor  gets  interest  while 
the  debtor  gets  productive  capacity. 

These  conditions  of  private  borrowing  may  be  true  in 
the  case  when  the  state  is  the  debtor,  but  frequently  are 
not.  The  important  difference  in  the  two  kinds  of  debts 
is  that  the  state  does  not  have  to  depend  upon  the  pro- 
ductivity of  its  borrowed  funds  to  meet  the  payment  of 
the  interest  or  principal.  The  payment  of  interest  some- 
times represents  the  charge  for  a  public  sacrifice,  rather 
than  for  a  public  benefit.  The  funds  may  have  been 
squandered  in  some  worthless  industrial  venture  or  ex- 
pended on  a  war  in  which  defeat  was  the  outcome.  And 
defeat  usually  comes  to  one  of  the  contending  belligerents. 

In  private  enterprise  the  squandering  of  funds,  or  fail- 
ure of  the  undertaking,  frequently  means  the  inability  to 
meet  liabilities.  In  the  case  of  the  state,  however,  lia- 
bilities can  be  met  from  the  general  taxing  power.  As 
long  as  taxes  can  be  secured,  the  interest  and  the  principal 
of  debts  can  be  paid.  The  ability  of  an  individual  to  meet 
a  liability  depends  upon  the  success  of  his  particular  in- 
dustry, while  the  ability  of  the  state  to  meet  liabilities 
depends  upon  the  success  of  industry  in  general.  It  is 
because  of  this  broad  patrimony  that  the  state  is  often 
able  to  secure  funds  on  better  terms  than  individuals. 

Purpose  of  Debts. — -The  power  of  a  state  to  meet  its 
indebtedness  charges  from  general  revenues  has  led  to 
much  discussion  of  what  constitutes  the  legitimate  pur- 


392  OUTLINES  OF  PUBLIC  FINANCE 

poses  for  public  borrowing.  Some  have  held  that  a  state 
should  borrow  only  in  those  cases  where  the  use  of  the 
funds  will  provide  the  means  of  paying  the  interest  and 
principal.  No  modern  state  restricts  its  borrowing  to 
such  narrow  limits.  No  definite  rule  can  be  given  as  to 
when  a  state  should  borrow,  and  the  best  measure  of 
justification  can  be  found  in  comparing  the  benefits  de- 
rived from  the  debt,  with  the  sacrifices  involved  because 
of  it.  Difficulty  creeps  hi  here  because  many  important 
public  services,  such  as  protection,  education,  and  parks, 
are  of  such  an  immaterial  nature  that  no  money  standard 
can  be  placed  upon  them. 

It  has  generally  been  conceded  to  be  bad  fiscal  policy 
for  a  state  to  expect  to  meet  continually  its  regularly  re- 
curring expenditures  from  borrowing.  No  one  would  jus- 
tify such  a  method  of  procedure  on  the  part  of  individuals. 
It  often  happens,  however,  with  both  states  and  individ- 
uals, that  revenues  are  less  than  were  anticipated,  or  that 
expenditures  are  greater.  It  may  be  necessary  to  borrow 
to  tide  over  until  new  revenues  are  available  from  the 
ordinary  sources,  or  from  new  ones.  When  states  borrow 
under  these  conditions  it  is  only  for  a  short  period,  and 
the  intention  is  not  to  create  permanent  indebtedness. 

Modern  public  borrowing,  with  no  difficulty  in  justify- 
ing it,  goes  much  farther  than  this.  It  is  the  pride  of  the 
American  people  to  improve  and  extend  public  property. 
Large  municipal  bond  issues  are  continually  being  floated 
for  the  purpose  of  improving  streets  and  parks,  for  better- 
ing educational  facilities,  or  for  undertaking  some  public 
enterprise,  such  as  the  waterworks  or  the  electric  plant. 
The  national  government,  as  a  rule,  has  made  its  ordinary 
improvements,  such  as  the  improvement  of  rivers  and 
harbors,  with  funds  which  regularly  flow  into  the  treasury 
each  year.  When  some  gigantic  project  is  undertaken, 
such  as  building  the  Panama  Canal,  borrowing  has  been 
used  to  supplement  the  other  sources  of  revenue. 

In  such  capitalistic  enterprises  as  some  that  have  been 


PUBLIC  INDEBTEDNESS  393 

suggested,  where  the  returns  are  expected  to  be  more  than 
enough  to  make  them  self-supporting,  there  is  little  ques- 
tion about  the  feasibility  of  borrowing  the  funds  to  estab- 
lish them.  The  justification  of  borrowing  for  giving  in- 
tangible benefits  will  depend  upon  the  ideas  which  are 
held  as  to  the  function  of  the  state,  and  since  these  are  so 
diverse,  no  generally  accepted  opinion  can  be  given.  The 
tendency,  however,  is  for  borrowing  to  occupy  a  more 
important  place  among  the  sources  of  public  revenues. 

203.  The  Economic  and  Political  Effects  of  Public  In- 
debtedness Are  Important. — Much  has  been  said  and 
written  concerning  the  economic  and  political  feasibility 
of  public  borrowing.  Opinions  have  varied  from  the  ut- 
most condemnation  to  the  heartiest  approval.  The  earlier 
writers  were  usually  extremists  in  whichever  view  they 
took,  while  modern  opinions  have  been  tempered  by  ex- 
perience. No  longer  are  a  nation's  debts  looked  upon  as 
gold  mines,  or  the  creators  of  an  equal  amount  of  capital, 
or  as  an  institution  necessarily  destructive  of  national  life. 
Certain  results  do  appear,  however  which  are  worthy  of 
notice, 

Competitor  for  Capital. — The  first  obvious  effect  of  pub- 
lic borrowing  is  that  the  government  enters  the  money 
market  as  a  competitor  against  individuals  for  capital. 
This  increase  in  the  demand  for  capital  naturally  tends  to 
increase  interest  rates.  The  state  has  the  advantage  over 
individual  competitors  that,  since  it  is  not  dependent 
upon  the  productivity  of  the  borrowed  capital  to  meet 
the  interest  or  principal  charge,  it  may  bid  for  the  capital 
by  offering  high  or  excessive  rates  of  interest.  It  has  the 
further  advantage  that,  in  offering  the  normal  or  a  lower 
rate  of  interest,  it  can  often  appeal  to  patriotism,  or  make 
special  concessions  to  its  creditors.  The  real  industrial 
effects  of  public  borrowing  will  depend  upon  the  method 
used  in  securing  the  loans,  and  the  purpose  to  which  the 
capital  is  applied. 

If  the  government  enters  the  money  market,  and  offers 


394  OUTLINES  OF  PUBLIC  FINANCE 

the  normal  rate  of  interest  with  no  special  concessions, 
the  effects  upon  industry  will  be  scarcely  noticeable.  If 
funds  are  secured,  they  will  come  from  a  supply  of  free 
capital,  for  industry  will  not  readjust  itself  to  supply  this 
demand.  Industrial  effects  would  result,  however,  when 
public  loans  are  sought  through  offering  a  high  rate  of 
interest.  In  the  first  place,  this  will  bring  forth  more 
savers,  and  a  greater  amount  of  saving  from  the  previous 
class  of  savers.  Money  that  has  been  spent  for  the  prod- 
ucts of  industry  will  now  be  turned  over  to  the  govern- 
ment. The  lessened  demand  decreases  the  profitableness 
of  industry,  until  it  is  probable  that  investments  of  capi- 
tal which  are  bringing  a  smaller  return  than  that  offered 
by  the  government,  when  readjustments  become  possible, 
will  seek  government  securities  rather  than  a  continuation 
in  industry.  Under  such  conditions  production  under  in- 
dividual management  will  decrease,  accompanied  by  a 
decrease  in  the  demand  for  labor. 

Use  of  Borrowed  Funds. — The  use  to  which  a  state  puts 
borrowed  funds  is  an  important  factor  hi  determining  the 
ultimate  effects  of  public  borrowing.  If  debts  are  con- 
tracted for  the  purpose  of  carrying  on  some  industrial 
enterprise,  such  as  constructing  and  operating  canals, 
railroads,  or  other  similar  enterprises,  the  effects  of  bor- 
rowing may  be  negligible.  It  may  simply  mean  that  the 
state  is  supplying  a  commodity  by  using  capital  and  em- 
ploying labor  that  would  be  demanded  otherwise  by  indi- 
viduals. Assuming  the  degree  of  efficiency  to  be  the  same 
in  either  case,  borrowing  by  the  government  would  have 
no  effect  on  the  social  income  or  upon  the  prices  paid  in 
the  money  or  labor  market. 

The  ability  of  the  state  to  undertake  industrial  enter- 
prises of  such  long  duration  and  of  such  gigantic  propor- 
tions that  they  would  not  appeal  to  individuals,  may  often 
enable  the  state  to  increase  the  social  income  by  increas- 
ing the  opportunities  for  the  use  of  capital  by  individuals, 
as  well  as  by  increasing  the  effectiveness  of  capital  already 


PUBLIC  INDEBTEDNESS  395 

in  use.  Borrowing  by  the  United  States  government  for 
constructing  the  Panama  Canal,  or  for  its  numerous  rec- 
lamation projects,  are  examples  of  this  sort. 

Not  all  the  returns  from  borrowing,  however,  are  spent 
in  fostering  productive  enterprise.  In  fact,  a  large  part 
has  been  used  in  the  destruction  of  productive  capacity, 
for  a  large  percentage  of  borrowed  funds  has  been  used  in 
the  prosecution  of  war.  In  such  cases  a  derangement  of 
the  industrial  system  occurs.  Individual  enterprises 
change  the  nature  of  their  production  in  order  to  supply 
the  materials  of  war,  which  the  government  is  demanding. 
These  materials  are  largely  for  immediate  consumption, 
and  with  their  consumption  a  large  amount  of  capital  and 
labor  is  destroyed.  The  result  is  that,  for  a  time  at  least, 
after  the  emergency  is  past,  the  amount  of  commodities 
which  can  be  produced  is  less  than  what  is  desired.  This 
results  in  higher  prices.  It  is  not  meant  to  infer  that  these 
effects  are  inherent  in  the  institution  of  credit — they 
merely  arise  from  the  use  which  the  state  makes  of  its 
funds.  Borrowing  simply  increases  the  ease  of  securing 
funds. 

Social  and  Political  Effects. — Public  indebtedness,  if  car- 
ried to  extremes,  may  also  influence  social  and  political 
institutions.  The  fear  has  often  been  expressed  that  the 
public  securities  will,  to  a  great  extent,  fall  into  the  hands 
of  a  wealthy  few,  and  thus  help  to  create  an  idle  leisure 
class.  It  is  also  quite  possible  that  this  class  of  security 
holders  may  secure  enough  political  power  to  influence 
legislatures  in  prolonging  a  state's  indebtedness  longer 
than  the  economic  situation  might  justify.  The  situation 
exists,  of  course,  that  a  part  of  the  citizenship  is  taxed  to 
pay  the  other  part.  Too  frequently  the  holders  of  public 
securities  bear  little  of  the  burden  of  taxes  to  meet  interest 
or  principal  charges. 

Experience  has  shown  that  these  fears  have  not  been 
entirely  unfounded.  Fortunes  have  been  swelled  through 
the  manipulations  of  the  public  security  market.  The 


396  OUTLINES  OF  PUBLIC  FINANCE 

Civil  "War  furnishes  a  number  of  examples  of  this.  That 
the  securities  tend  to  fall  into  the  hands  of  a  few  is  illus- 
trated by  the  fact  that  before  the  Great  War  the  entire 
amount  of  United  States  bonds  was  held  by  less  than  one 
thousand  individuals  and  six  hundred  corporations.  At 
present  about  one  fifth  of  the  holders  of  United  States 
bonds  live  in  one  state,  and  these  hold  nearly  one  third  of 
the  total  issue. 

Another  danger  of  public  borrowing  is  that  since  the 
burden  of  present  expenditures  is  not  realized,  legislators 
may  undertake  ventures,  the  wisdom  of  which  would  be 
seriously  questioned  if  the  funds  had  to  be  secured  from 
taxes.  In  other  words,  where  public  borrowing  can  be 
resorted  to  with  little  difficulty,  the  citizenship  will  feel 
less  obligation  to  guard  closely  the  public  purse  strings 
than  if  expenditures  had  to  be  met  through  the  channels 
of  taxation.  This  danger  was  recognized  in  the  formation 
of  most  of  the  constitutions  of  the  American  common- 
wealths. These  generally  contain  strict  limitations  upon 
the  power  of  the  legislatures  to  issue  bonds.  Similar  re- 
strictions are  generally  placed  upon  the  governing  bodies 
of  municipalities. 

International  Complications. — The  holding  of  the  securi- 
ties of  one  country  by  another  may  become  the  source  of 
political  difficulties.  Numerous  examples  have  arisen 
where  smaller  nations  have  become  involved  with  larger 
ones  because  of  debt  obligations.  International  law  has 
established  the  principle  that  any  unsatisfied  debts  of  one 
nation  held  by  another  are  sufficient  grounds  for  diplo- 
matic intervention.  This  intervention  has  often  taken 
the  form  of  armed  force.  Egypt  became  a  British  pro- 
tectorate, among  other  reasons,  because  she  abused  the 
credit  which  England  had  extended  to  her.  The  same 
influence  was  potent  in  the  French  domination  of  Tunis. 
The  Monroe  Doctrine  has  been  called  into  use  to  prevent 
the  forcible  seizure-  of  property  to  settle  debt  claims 
among  some  of  our  southern  neighbors,  especially  Mexico. 


PUBLIC  INDEBTEDNESS  397 

It  is  entirely  possible  for  bonds  issued  by  some  common- 
wealths to  be  held  by  a  foreign  power.  The  political  en- 
tanglements with  the  Federal  government,  which  a  forced 
collection  of  such  an  obligation  would  entail,  can  be  easily 
imagined.  As  public  credit  becomes  more  firmly  estab- 
lished, and  as  nations  less  frequently  repudiate  either 
principal  or  interest,  these  difficulties  automatically  dis- 
appear. 

204.  All  Countries  Have  Not  Taken  the  Same  Attitude 
Toward  Extinguishing  the  Public  Debt. — The  question 
naturally  arises  as  to  what  disposition  shall  be  made  of  a 
public  debt  after  it  has  been  contracted.  The  answer 
which  ordinarily  occurs  to  American  students  is  that  the 
debt  will  be  canceled  at  the  earliest  convenience.  The 
American  people  have  shown  little  sympathy  with  the 
policy  of  perpetuating  a  debt.  Most  other  countries,  to 
a  greater  or  less  degree,  do  not  share  this  attitude.  Eng- 
land, to  some  extent,  assumes  the  American  viewpoint, 
while  the  countries  of  Latin  origin  generally  show  little 
concern  in  regard  to  the  extinction  of  their  indebtedness. 
Since  these  two  viewpoints  are  prevalent,  it  is  of  impor- 
tance to  note  the  reasons  advanced  for  the  adoption  of 
each  policy. 

Reasons  for  Extinguishing  Debts. — A  factor  of  primary 
importance  in  the  consideration  of  debts  is  the  burden 
placed  upon  the  citizens  of  a  country,  and  it  is  upon  this 
phase,  largely,  that  the  policy  of  debt  extinguishment  dif- 
fers. The  payment  of  a  debt  necessarily  means  heavier 
taxation  with  a  corresponding  burden  upon  industry.  If 
the  principal  is  allowed  to  stand,  however,  the  burden  can 
gradually  be  decreased  by  the  natural  expansion  of  indus- 
try, and  gradual  increase  of  the  social  income  and  wealth. 
With  this  development  the  burden  of  an  interest  charge 
gradually  becomes  less  because  the  financial  ability  of  the 
citizenship  has  been  increased.  In  England,  for  example, 
in  1815,  the  interest  charge  of  the  public  debt  was  slightly 
less  than  10  per  cent  of  the  annual  social  income.  By  1880 


398  OUTLINES  OF  PUBLIC  FINANCE 

the  same  interest  charge  represented  less  than  a  3  per 
cent  burden  upon  the  social  income.  The  same  situation 
is,  of  course,  true  in  many  other  countries. 

The  tendency  for  money  to  depreciate  in  value  also 
lessens  the  burden  of  indebtedness.  In  periods  when  the 
value  is  appreciating,  as  following  1873,  however,  the  op- 
posite effect  will  ensue.  When  the  present  indebtedness 
of  most  countries  is  taken  into  account,  however,  it  is  too 
much  to  hope  that  currency  depreciation  will  make  any 
appreciable  diminution  in  the  burden.  Debts  are  fre- 
quently contracted  at  times  when  currency  is  at  the  peak 
of  depreciation — in  periods  of  war  inflation — and  the 
chances  are  that  the  subsequent  changes  in  the  value  of 
the  currency  will  enhance,  rather  than  decrease,  the  bur- 
den of  indebtedness. 

The  burden  which  the  extinction  of  a  debt  will  place 
upon  the  industry  of  a  country  has  often  been  over- 
emphasized. It  is  true  that  the  state  has  no  independent 
source  of  capital  out  of  which  to  pay  the  bondholders. 
It  must  resort  to  taxation,  and  taxes  are  paid  from  the 
capital  or  income  held  by  the  citizenship.  What  the  state 
does  is  to  collect  a  fund  from  one  class  of  citizens,  the  tax- 
payers, and  turn  it  over  to  another  class — the  bondholders. 
In  order  that  nothing  be  lost  by  the  transfer,  the  second 
class  must  use  the  funds  as  efficiently  as  the  first  class 
would  have  used  them.  It  is  not  at  all  unlikely  that  they 
may  be  used  more  efficiently.  If  taxes  are  so  contrived 
that  they  take  funds  for  the  state  that  otherwise  would 
have  been  squandered,  then  productive  capacity  may 
actually  be  increased  by  the  payment  of  debts. 

The  productive  capacity  of  a  country  would  be  de- 
creased, of  course,  if  its  debts  were  paid  when  the  security 
holders  lived  in  another  country.  This  is  usually  true  to 
such  a  small  extent  as  to  have  little  influence  in  shaping 
the  course  of  action.  Cancellation  of  debts  may  have  a 
further  wholesome  effect  upon  industrial  workers,  in  that 
their  minds  are  relieved  from  the  thought  that  a  part  of 


PUBLIC  INDEBTEDNESS  399 

the  products  of  their  exertions  is  going  to  the  class  of 
bondholders,  and  perhaps  is  assisting  to  maintain  them  as 
an  idle  class. 

205.  Public  Debts  May  Take  a  Number  of  Forms. — Not 
all  public  debts  are  of  the  same  nature,  and  may  differ 
materially  in  a  number  of  ways.  One  of  the  first  distinc- 
tions to  be  drawn  was  between  funded  and  unfunded 
debts.  As  the  terms  indicate,  a  funded  debt  was  one 
against  which  some  particular  fund  or  collateral  was 
placed  to  insure  payment,  while  an  unfunded  one  was 
simply  a  debt  contracted  on  general  credit.  These  terms 
are  still  in  common  usage,  yet  their  significance  has  lost 
much  of  the  defmiteness  of  the  earlier  years.  Not  infre- 
quently the  terms  bonded  and  floating  debts  are  used  as 
almost  synonymous  with  the  two  older  expressions.  In 
general,  the  important  distinction  between  a  funded  or 
bonded  debt,  and  an  unfunded  or  floating  one,  is  the  time 
element.  The  old  idea  of  security  has  disappeared  to  a 
large  extent,  and  in  many  cases  has  been  reversed.  Mod- 
ern long-term  obligations,  as  a  rule,  are  issued  upon  the 
general  public  credit,  while  short-term  obligations  fre- 
quently have  specific  revenues  pledged  for  their  redemp- 
tion. Public  borrowings  for  short  periods,  such  as  to  meet 
a  deficiency  of  revenue,  or  a  small  unexpected  call  upon 
the  treasury,  which  can  soon  be  taken  care  of  from  general 
revenues,  take  the  form  of  floating  debts.  A  good  exam- 
ple of  borrowing  of  this  nature  was  the  large  amount  of 
treasury  certificates  issued  by  the  Federal  government 
during  the  Great  War  in  anticipation  of  revenue  from  the 
Liberty  Loans  and  taxes.  The  Liberty  Loans,  of  course, 
would  be  classed  as  bonded  or  funded  debt. 

The  use  of  the  expressions  " short  time"  and  "long 
time,"  hi  the  above  distinction,  is  far  from  definite.  It 
is,  however,  the  best  that  can  be  made.  There  is  no  uni- 
formity among  writers  or  fiscal  authorities  in  the  various 
political  units  as  to  what  constitutes  a  short-term  or  a 
long-term  obligation.  With  some,  a  short-term  loan  may 


400  OUTLINES  OF  PUBLIC  FINANCE 

extend  over  a  period  of  years,  while  with  others  it  may 
not  be  considered  proper  to  extend  over  as  many  weeks. 
It  is  to  be  hoped  that  some  more  definite  distinction  will 
gradually  be  adopted.  It  might  not  be  disadvantageous 
if  the  commercial  distinction  between  short  and  long  term 
obligations  would  convey  similar  ideas  when  applied  to 
fiscal  transactions. 

Methods  of  Originating  Debts. — A  second  distinction  in 
public  securities  may  be  based  upon  the  difference  in  the 
way  in  which  the  obligation  originates.  The  sovereign 
power  of  the  state  gives  it  the  advantage  over  the  individ- 
ual borrower,  in  that  it  can  force  loans  from  its  citizen- 
ship. These  forced  loans  frequently  take  the  form  of 
short-term  obligations,  such  as  the  treasury  certificates 
which  have  frequently  been  issued  in  payment  for  goods 
or  services  at  times  when  funds  were  scarce.  These  cer- 
tificates are  usually  interest-bearing,  and  made  payable 
as  soon  as  sufficient  revenue  is  expected  to  accrue.  Cities 
frequently  make  use  of  similar  forms  of  obligations  to  tide 
over  a  shortage  of  funds.  The  action  of  the  state  in  issu- 
ing fiat  money  is  somewhat  similar  to  a  forced  loan,  yet 
in  the  strict  sense  it  cannot  be  called  a  credit  transaction. 
The  importance  of  forced  loans,  in  the  modern  state,  is 
comparatively  insignificant. 

The  class  of  public  loans  which  is  by  far  the  most  im- 
portant comprises  those  obligations  in  which  a  voluntary 
agreement  has  been  entered  into  between  the  state  as 
debtor,  and  the  individual  as  creditor.  There  may  be 
many  terms  about  which  the  agreement  must  be  made, 
and  it  is  on  the  basis  of  these  terms  that  voluntary 
loans,  or,  as  some  call  them,  contract  loans,  may  be 
classified.1 

The  debtor-creditor  relation  with  the  state  often  arises 
through  comparatively  simple  transactions,  in  which  the 
fact  that  the  state  becomes  a  debtor  is  often  not  consid- 

1  For  an  excellent  classification  of  contractural  debts,  see  Introduction  to 
Public  Finance,  by  Plehn,  third  ed.,  p.  389. 


PUBLIC  INDEBTEDNESS  401 

ered.  In  these  cases  the  redemption  of  the  debt  does  not 
depend  wholly,  or  even  in  part,  upon  the  credit  of  the 
state,  but  upon  additional  assurances.  When  an  individ- 
ual purchases  a  postal  money  order,  he  becomes  the 
creditor  of  the  state,  yet  he  feels,  in  no  sense,  that  the 
credit  of  the  state  is  involved.  The  numerous  cases  in 
which  some  form  of  collateral  is  required  before  business 
transactions  are  permitted,  are  other  examples.  Insur- 
ance companies  are  often  required  to  deposit  bonds  before 
engaging  in  business,  while  national  banks  must  deposit 
bonds  with  the  Federal  treasury  before  circulating  notes 
may  be  issued.  In  all  these  cases  the  amount  received  by 
the  government  is  kept  for  redeeming  the  obligation,  so 
that  its  credit  is  an  insignificant  factor.  Much  the  same 
situation  exists  between  the  government  and  the  holders 
of  its  representative  paper  money.  The  holder  of  gold 
and  silver  certificates  is  protected  by  a  100  per  cent  de- 
posit of  specie. 

In  the  more  purely  credit  transactions,  differences  in 
the  contract  frequently  exist.  The  state  may  agree  to 
pay  no  more  than  interest.  This  is  true  when  a  govern- 
ment issues  a  perpetual  bond,  which  is  frequently  done 
by  some  European  countries,  and  was  formerly  attempted 
in  the  United  States.  It  may  be  true  that  the  government 
agrees  to  pay  no  more  than  the  principal.  This  situation 
is  approximated  when  a  state  uses  redeemable  paper 
money.  The  most  ordinary  contract  is  one  in  which  the 
state  agrees  to  make  payment  of  both  principal  and  inter- 
est, the  details  of  which  will  depend  upon  the  time  for 
which  the  capital  will  be  needed,  the  general  condition  of 
the  money  market,  and  the  pressure  of  the  state's  need. 
Loans  have  been  negotiated  frequently  on  some  annuity 
plan  of  payment,  in  which  the  creditor  is  to  receive  a  fixed 
payment  for  a  definite  number  of  years  or  for  life.  In  all 
these  cases  the  creditor  has  been  a  voluntary  partner  to 
the  contract,  and  expects  the  state  to  comply  to  the  terms 
agreed  upon. 


102  OUTLINES  OF  PUBLIC  FINANCE 

206.  Many  Problems  Arise  in  Floating  a  Bond  Issue.— 
Many  problems  confront  the  fiscal  authorities  when  they 
decide  to  float  an  issue  of  public  securities.  The  rate  of 
interest  is  an  important  consideration,  as  well  as  the 
method  of  securing  subscriptions  to  the  loans.  Other  con- 
siderations are  from  what  source  the  funds  will  come,  the 
special  privileges  which  shall  attach  to  the  holders  of  the 
securities,  and  the  length  of  tune  they  are  to  run.  Many  mi- 
nor considerations  exist,  also,  which  must  not  be  neglected. 

Interest  Rate. — The  rate  of  interest  which  the  securities 
are  to  draw,  while  it  is  not  a  distinct  factor  unrelated  to 
other  conditions,  is  of  primary  importance  in  determining 
the  conditions  of  a  bond  issue.  Ordinarily  the  attempt 
will  be  made,  if  the  bonds  are  to  be  put  on  the  market 
and  sold,  to  have  the  rate  of  interest  as  near  as  possible 
to  the  current  rate.  If  it  should  be  below  this,  the  bonds 
will  sell  below  par,  and  the  principal  of  the  indebtedness 
will  be  larger  than  the  amount  which  becomes  available 
for  the  use  of  the  state.  If  the  provision  is  imposed  that 
the  bonds  must  be  accepted  at  par,  the  state  will  be  dis- 
appointed in  finding  a  market  for  its  securities  unless  a 
strong  element  of  patriotism  be  hi  existence.  Franklin 
experienced  this  situation  in  attempting  to  borrow  from 
European  countries  during  the  Revolution.  Because  of 
the  low  rate  of  interest  he  was  authorized  to  pay,  no  aid 
could  be  secured  except  from  France,  and  this  was  given 
from  other  than  economic  motives.  It  may  happen  at  a 
time  when  funds  are  scarce,  and  the  needs  of  the  govern- 
ment are  pressing,  that  the  rate  of  interest  will  have  to  be 
higher  than  the  current  rate  in  order  to  draw  funds  to  the 
use  of  the  government. 

Other  Conditions. — The  success  of  a  loan,  where  all  the 
conditions  are  predetermined  by  the  fiscal  authorities, 
depends  upon  their  ability  to  judge  the  money  market 
and  the  desires  of  the  prospective  purchasers.  Frequently 
these  predetermined  conditions  are  designed  to  attract 
buyers  for  the  securities.  Freedom  from  ordinary  taxes  is 


PUBLIC  INDEBTEDNESS  403 

perhaps  the  most  general  privilege  attached  to  govern- 
ment securities.  Tax  privileges  are  not  always  the  same, 
as  is  evidenced  by  the  various  issues  of  the  Liberty  Loans. 
The  method  of  interest  payment  is  made  as  attractive  as 
possible.  Frequently  bonds  of  the  same  issue  are  partially 
of  the  registered  type,  and  the  remainder  coupon  bonds. 
Registered  bonds  appeal  to  investors  who  seek  protection 
from  loss  and  theft,  while  the  others  are  more  convenient 
to  the  general  investor. 

In  determining  the  clientele  of  purchasers,  the  size  of 
the  bond  is  an  important  item.  Where  it  is  desired  that 
the  subscribers  come  from  the  general  population,  the  de- 
nominations of  the  bonds  will  be  comparatively  small. 
The  fifty  dollar  "baby  bond"  used  in  the  Liberty  Loans 
is  a  familiar  example  of  appeal  to  popular  subscription. 
The  war  saving  stamps  and  war  certificates  were  designed 
to  appeal  to  still  smaller  investors.  The  length  of  time 
the  bond  is  to  run  has  much  to  do  with  its  desirability  as 
an  investment,  therefore  this  feature  is  often  varied  to 
appeal  to  different  classes. 

Disposal  of  Securities. — Where  comparatively  small 
sums  are  desired,  the  state  need  not  predetermine  the 
interest  rate,  but  has  the  alternative  of  accepting  bids  for 
the  supplying  of  the  needed  funds.  The  fiscal  authorities 
can  make  it  known  to  banking  and  brokerage  houses,  and 
the  general  public,  if  considered  desirable,  that  a  certain 
amount  is  needed  for  a  certain  length  of  time,  that  the 
securities  will  bear  certain  privileges,  and  let  the  compe- 
tition of  the  prospective  lenders  decide  the  interest  rate. 
In  this  case  the  burden  of  the  speculative  element  in  the 
money  market  rests  to  a  greater  extent  on  the  purchaser 
of  the  securities.  If  the  market  for  securities  becomes 
more  favorable  within  the  period  of  the  loan,  the  purchaser 
may  sell  and  be  the  gainer;  should  the  market  become 
less  favorable,  the  loss  must  be  his. 

In  disposing  of  a  bond  issue,  government  officials  may 
make  use  of  a  number  of  agencies.  The  need  for  different 


404  OUTLINES  OF  PUBLIC  FINANCE 

methods  of  appeal  varies  with  the  size  of  the  loan  as  well 
as  with  the  number  and  classes  of  citizens  whom  the  offi- 
cials desire  to  interest.  Everyone  is  familiar  with  the 
various  methods  of  approach  which  the  Federal  govern- 
ment used  in  selling  the  different  Liberty  Bonds,  Adver- 
tising campaigns  were  carried  on  by  the  use  of  billboards, 
in  magazines,  and  in  the  newspapers.  Literature  was 
mailed  to  the  individual,  while  appeals  were  made  in  the 
churches  and  theaters.  The  features  of  patriotism,  duty, 
sound  investment,  and  even  loyalty,  were  emphasized. 
Different  forms  of  banking  institutions  were  used  exten- 
sively as  government  agents  in  disposing  of  the  securities, 
while  many  other  business  houses,  as  well  as  individuals, 
gave  unstintedly  of  their  time  and  energy  to  push  the 
sales.  In  short,  practically  every  method  of  salesmanship 
is  open  to  the  government,  and  extensive  use  has  been 
made  of  the  various  methods  of  approach. 

207.  Administering  a  Public  Debt  Presents  Complex 
Problems. — We  have  already  noticed  that  public  credit 
may  take  the  form  of  perpetual  bonds,  a  principal  and 
interest  charge,  or  some  form  of  annuity  payment.  In 
administering  these  various  forms,  especially  the  princi- 
pal and  interest  charge,  perplexing  problems  often  arise. 
Problems  occasionally  arise  when  a  state  with  perpetual 
bonds  or  life  annuities  decides  to  reduce  its  indebtedness, 
but  these  do  not  occur  as  frequently  as  the  problems  of 
conversion  or  payment  of  a  terminable  debt. 

Conversion  of  Debt. — A  state  may  frequently  desire  to 
change  the  nature  of  a  bond  issue.  It  is  not  able  to  cancel 
the  indebtedness,  but  has  an  opportunity  to  put  it  into 
a  more  favorable  form.  It  often  happens  that  the  exten- 
sive government  borrowings  are  made  in  times  of  strin- 
gency, and  the  rate  of  interest  is  necessarily  high.  Had 
it  been  possible  to  wait  a  few  years  much  better  terms 
might  have  been  secured.  It  is  the  problem  of  the  fiscal 
authorities,  while  they  cannot  cancel  the  debt,  to  refund 
or  convert  it  into  an  issue  of  more  favorable  terms.  Most 


PUBLIC  INDEBTEDNESS  405 

modern  government  bonds  are  so  drawn  as  to  aid  this 
procedure.  A  5-30  bond,  for  example,  is  one  which  may 
be  paid  any  time  after  five,  and  before  thirty  years  from 
the  time  of  issue.  If,  after  five  years,  a  loan  can  be  con- 
tracted for  on  much  better  terms  than  the  original  one, 
the  fiscal  authorities  need  but  float  a  new  issue  of  securi- 
ties and  use  the  proceeds  to  take  up  the  old  obligations. 
It  often  happens  that  a  number  of  conversions  of  the  same 
original  debt  may  take  place  until  satisfactory  terms  are 
the  result.  The  holders  of  the  old  obligations  are  fre- 
quently given  the  privilege  of  exchanging  them  for  issues 
of  the  new,  at  a  fixed  rate  of  exchange.  These  processes 
are  not  designed  to  reduce  the  indebtedness,  but  simply 
to  change  its  form. 

Use  of  Sinking  Fund. — The  general  tendency  has  been 
for  countries  to  adopt  the  policy  of  debt  extinction.  The 
use  of  this  policy  creates  the  problem  of  securing  funds  to 
meet  the  debt  obligation  when  it  falls  due.  Conversion 
may  be  used  to  postpone  payment,  but  it  does  not  cancel 
it.  A  scheme  for  debt  payment  which  was  developed  in 
England,  and  which  is  widely  used,  is  known  as  the  sink- 
ing fund.  Under  this  scheme,  in  order  to  meet  a  debt 
obligation  when  it  matures,  there  is  set  aside  a  certain 
sum  from  the  general  revenue  each  year,  so  that  the  sum 
of  the  accumulations  will  equal  the  debt. 

The  early  use  of  the  sinking  fund  was  very  popular 
in  England  because  of  the  fallacious  idea  that  it  provided 
a  burdenless  method  of  paying  indebtedness.  A  small 
amount  of  bonds  were  to  be  purchased  and  retained  by 
the  government,  and  the  interest  on  these  bonds  the  next 
year  was  to  be  used  in  buying  more  bonds.  This  was  to 
continue  until  these  interest  payments  canceled  the  debt. 
The  scheme,  no  doubt,  would  eventually  cancel  the  debt, 
but  the  burden  of  doing  so  would  still  fall  on  the  taxpayer. 
The  annual  interest  charge  which  made  the  purchasing 
power  had  to  come  from  somewhere,  and  taxation  was  the 
only  source. 


406  OUTLINES  OF  PUBLIC  FINANCE 

Any  justification  for  the  use  of  a  sinking  fund  does  not 
come  from  the  reduction  of  burdens,  but  from  providing 
the  assurance  that  a  source  of  funds  will  be  on  hand,  out 
of  which  the  payment  of  debts  can  be  made  when  they 
fall  due.  The  maintenance  of  such  a  fund  may  even  en- 
hance burdens.  The  administration  of  the  fund  must  be 
provided  for.  It  must  be  kept  separate  from  other  gov- 
ernment funds,  so  that  the  treasury  will  not  be  subjected 
to  the  evils  of  a  surplus,  and  so  that  the  fund  will  not  be 
used  for  other  purposes  than  the  cancellation  of  the  debt. 
The  fund  should,  of  course,  be  used  in  some  productive 
capacity,  or  it  will  entail  the  burden  of  putting  capital 
out  of  use.  Yet  it  must  be  kept  absolutely  safe  or  the 
scheme  fails.  The  administration  of  such  a  fund  grows 
into  a  task  of  no  little  magnitude. 

Sinking  Fund  in  the  United  States. — The  various  politi- 
cal units  in  the  United  States  have  made  extensive  use  of 
some  sinking  fund  arrangement.  At  the  end  of  the  Revo- 
lution the  early  English  scheme  of  an  accumulating  in- 
terest fund  was  adopted.  A  little  later  specified  revenue 
receipts  were  added  to  this.  Much  the  same  provision 
was  made  during  the  Civil  War  to  insure  debt  payment. 
Customs  receipts  were  to  go  to  the  payment  of  interest 
and  to  redeem  a  part  of  the  debt.  The  redeemed  debt,  as 
well  as  its  interest  charge,  was  to  be  used  as  a  sinking 
fund. 

The  sinking  fund  arrangement  has  again  been  invoked 
to  take  care  of  the  liquidation  of  the  Liberty  Loans.  The 
period  required  by  the  arrangement  is  twenty-five  years. 
Experience  has  shown,  however,  that  such  arrangements 
have  not  been  needed  by  the  Federal  government,  for  its 
debts  in  the  past  have  been  canceled  more  rapidly  than 
the  sinking  fund  provision  anticipated.  American  states 
and  cities  have  made,  of  necessity,  a  wide  use  of  this  prin- 
ciple of  debt  payment.  State  constitutions  generally 
make  it  obligatory  that,  upon  the  contraction  of  a  debt 
by  the  sta,te  or  its  cities,  provision  for  the  payment  of  the 


PUBLIC  INDEBTEDNESS 


407 


debt  must  immediately  be  made  through  the  establish- 
ment of  some  sinking  fund  arrangement. 

208.  A  Study  of  Indebtedness  in  the  United  States  Pre- 
sents Interesting  Conclusions. — Statistics  of  indebtedness 
of  the  Federal  government  and  some  of  the  minor  political 
divisions,  inaccurate  as  they  may  be,  present  some  inter- 
esting comparisons.  The  following  table  gives  the  com- 
parative net  indebtedness  of  the  Federal,  state,  and  city 
governments  for  five  successive  years.1 

NET  INDEBTEDNESS 


STATES 

NATION 

CITIES  WITH  MORE 

THAN    30,000 

POPULATION 

Year 

Total 

Per 

Capita 

Total 

Per 
Capita 

Total 

Per 
Capita 

Not 
avail- 
able 
$77.53 
77.78 
76.64 
75.56 

1919 
1918 
1917 
1916 
1915 

$519,887,000 
502,493,000 
501,943,000 
459,661,000 
424,155,000 

$4.95 

4.86 
4.93 
4.59 
4.31 

£24,479,302,000 
10,924,281,000 
1,908,635,000 
989,220,000 
1,090,148,000 

$232.95 
104.59 
18.56 
9.77 
10.95 

$2,698,000,000 
2,661,451,000 
2,587,083,000 
2,473,104,000 
2,355,149,000 

A  comparison  of  these  figures  shows  a  general  increase 
in  indebtedness,  and  an  enormous  increase  in  the  indebted- 
ness of  the  Federal  government,  a  part  of  which  can  be 
accounted  for  by  the  Great  War.  In  normal  years  the 
national  indebtedness  has  been  much  more  than  double 
that  of  the  states.  The  city  indebtedness,  on  the  other 
hand,  has  been  more  than  double  that  of  the  Federal 
government. 

Indebtedness  of  States. — No  uniformity  can  be  found  in 
comparing  the  indebtedness  of  individual  states.  The 
following  table,  which  shows  the  indebtedness  of  some  of 
the  states,  indicates  that  the  Eastern  states  and  newer 
Western  states  have  an  indebtedness  far  exceeding  that 
of  the  Central  states.  This  can  be  explained  readily  when 
due  cognizance  is  taken  of  the  fact  that  in  the  Eastern 

1  This  table  and  the  ones  following  in  this  chapter,  unless  otherwise  indi- 
cated, were  compiled  from  reports  of  the  Bureau  of  the  Census. 


408 


OUTLINES  OF  PUBLIC  FINANCE 


states  much  public  improvement  is  being  undertaken, 
while  in  the  newer  states  the  process  of  initial  develop- 
ment is  still  present.  In  the  Central  states,  however,  the 
developmental  stage  is  past,  and  they  have  not  as  yet 
begun  the  stage  of  intensive  improvements.  The  state  of 
Pennsylvania  appears  an  exception  to  this  generalization. 
This  situation  is  explained  by  the  fact  that  it  is  a  part  of 
her  fiscal  policy  to  avoid  as  nearly  as  possible  the  creation 
of  indebtedness. 

TABLE  SHOWING  THE  NET  INDEBTEDNESS  OF  PARTICULAR  STATES  (1918) l 


State 

Total 
Indebtedness 

Per 
Capita 

Funded 

Floating 

Arizona  

$    3  509  000 

$13  10 

$     3,009,000 

Illinois  

3,997,000 

0.64 

243,000 

$1,814,000 

Massachusetts  
Pennsylvania.  .  . 

134,158,000 
4,645,000 

35.57 
0  54 

130,618,000 
1,072  000 

534,000 
52,000 

Virginia 

23  931  000 

10  84 

22  112  000 

1  689  000 

Colorado 

5881  000 

5  96 

4  548  000 

Oklahoma  
New  York  

7,856,000 
241,164,000 

3.37 

22.85 

6,329,000 
236,215,000 

669,000 

The  growth  of  the  indebtedness  of  a  progressive  state 
such  as  New  York,  over  a  period  of  years,  is  interesting,  as 
is  also  the  growth  in  a  central  state,  such  as  Illinois,  which 
has  not  as  yet  undertaken  such  extensive  public  works. 
The  comparative  tables  follow.  Illinois  is  now  beginning 
road  building,  so  that  in  the  future  it  is  possible  the  wide 
differences  in  indebtedness  may  disappear. 

NET  INDEBTEDNESS  OF  THE  STATE  OF  NEW  YORK 


Year 

Total 

Per  Capita 

Funded 

Floating 

1890 

$    4,964,000 

$  0.30 

$    4,964,000 

1900 

10,941,000 

1  31 

10,941,000 

1910 
1912 
1918 

58,532,000 
111,457,000 
241,164,000 

3.86 
9.05 
22.85 

57,919,000 
110,391,000 
236,215,000 

$    612,000 
1,066,000 
669,000 

1  The  addition  of  the  funded  and  floating  indebtedness  does  not  give 
the  total  indebtedness  because  a  few  items  are  not  considered  in  either 
class. 


PUBLIC  INDEBTEDNESS  409 

NET  INDEBTEDNESS  OF  THE  STATE  OF  ILLINOIS 


Year 

Total 

Per  Capita 

Funded 

Floating 

1890 

$1,811,000 

$0.47 

$1,184,000 

$    626,000 

1900 

2,180,000 

0.45 

1,685,000 

495,000 

1910 

2,244,000 

0.40 

1,830,000 

413,000 

1912 

2,275,000 

0.39 

1,831,000 

441,000 

1918 

3,997,000 

0.64 

243,000 

1,814,000 

Indebtedness  of  Cities. — The  indebtedness  of  cities  is 
found  to  vary  directly  with  the  size  of  the  city.  In  nearly 
every  case  the  floating  debt  is  less  than  the  funded.  The 
limitations  placed  upon  the  indebtedness  of  some  munic- 
ipalities prevents  figures  from  indicating  the  extent  to 
which  borrowing  would  be  used  if  the  restrictions  were 
absent.  The  following  table  shows  the  indebtedness  of 
some  cities,  the  population  of  which  varies: 

NET  INDEBTEDNESS  OF  PARTICULAR  CITIES  (1918) 


City 

Total 

Per 
Capita 

City 

Total 

Per 
Capita 

New  York.  .  .  . 
Chicago  

$1,005,055,000 
72,728,000 

$175.17 

28.55 

Albany  
Harrisburg.  .  .  . 

$7,770,000 
2,555,000 

$72.87 
34.86 

Cincinnati.  .  .  . 

66,706,000 

95.93 

Topeka  

1,670,000 

33.72 

Many  cities  in  the  various  groups  will  have  a  total  and 
per  capita  indebtedness  out  of  proportion  to  the  popula- 
tion. The  city  of  Chicago,  for  example,  has  a  remarkably 
low  indebtedness  for  its  size.  If  space  permitted  to  show 
figures  for  a  large  number  of  cities,  the  tendency  for  in- 
debtedness to  increase  in  proportion  to  the  population 
could  easily  be  traced. 

209.  The  Indebtedness  of  Many  Countries  Has  Reached 
Vast  Proportions. — The  indebtedness  of  the  principal  na- 
tions of  the  world  has  become  so  large  as  to  be  almost 
incomprehensible.  The  Great  War  was  responsible  to  a 
large  extent,  of  course,  for  this  situation.  The  following 
table  of  the  approximate  indebtedness  of  a  few  nations, 
before  and  after  the  war,  will  indicate  to  what  extent 
this  was  responsible  for  the  present  situation. 


410 


OUTLINES  OF  PUBLIC  FINANCE 


APPROXIMATE  INDEBTEDNESS  OP  IMPORTANT  NATIONS  BEFORE  AND  AFTER 
THE  GREAT  WAR  l 


Country 

Debt,  August  1,  1914 

Debt,  January  1,  1920 

United  States  

$1,000,000,000 

$26,000,000,000 

Great  Britain 

3  500  000  000 

42  000  000  000 

France 

6,500,000,000 

33  000  000  000 

Russia  

4,600,000,000 

30,000,000,000 

Italy.. 

2,800,000,000 

13,000,000,000 

German  Empire 

5  200,000,000 

45  000  000  000 

The  real  meaning  of  such  an  immense  indebtedness  can 
be  understood  only  when  the  burden  upon  the  citizenship 
is  considered.  The  indebtedness  of  the  United  States  was 
contracted  through  the  four  Liberty  Loans,  the  Victory 
Loan,  and  by  issuing  thrift  stamps  and  war  saving  cer- 
tificates. The  interest  rate,  conditions  of  payment,  and 
other  items,  varied  with  the  different  loans,  the  details  of 
which  will  be  discussed  in  the  chapter  on  Financing  an 
Emergency.  The  figures  in  the  above  table  are  so  large 
as  to  be  beyond  comprehension.  A  debt  is  important  and 
burdensome  to  a  nation,  however,  only  as  it  affects  par- 
ticular factors.  Some  of  the  important  items  to  be  con- 
sidered are  the  burdens  placed  upon  each  individual,  as 
well  as  upon  the  national  wealth  or  the  national  income 
of  a  country.  The  real  significance  of  the  present  vast 
indebtedness  can  best  be  appreciated  by  attempting  an 
estimate  of  some  of  these  classes  of  burdens. 

It  is  estimated  that  the  national  wealth  of  the  United 
States  is  between  $275,000,000,000  and  $300,000,000,000. 
If  this  be  correct,  the  indebtedness  amounts  to  between 
5  and  8  per  cent  of  the  national  wealth,  and  is  a  per  capita 
burden  of  about  $225.  An  item  exists,  however,  which 
should  be  deducted  from  this.  About  $10,000,000,000 
was  loaned  to  foreign  countries  under  the  stipulation  that 
its  liquidation  should  be  used  to  cancel  an  equal  amount 
of  the  national  debt.  This  amount  of  the  debt,  then, 

1  These  figures  are  taken  from  a  booklet,  The  World's  War  Debt,  published 
by  the  Mechanics  and  Metals  National  Bank, 


PUBLIC  INDEBTEDNESS  411 

should  entail  no  burden  upon  the  citizenship  of  the  United 
States. 

The  burden  of  the  annual  charge  upon  the  national 
income  is  no  less  significant.  It  has  been  estimated  that 
the  annual  social  income  of  the  United  States  is  approxi- 
mately $60,000,000,000.  The  interest  charge  alone 
amounts  annually  to  about  $1,000,000,000.  To  meet  this 
a  little  more  than  $1.60  must  be  taken  from  each  $100  of 
the  national  income.  In  addition  to  this  the  burden  of  pro- 
viding for  the  sinking  fund  must  be  added.  This  entails 
nearly  another  half  billion  dollars.  This,  added  to  the 
interest  charge,  would  take  a  little  less  than  $2.50  from 
each  $100  income,  or  about  $15  per  capita.  Here,  again, 
the  loan  to  foreign  countries  has  a  significant  effect. 
When  the  interest  and  sinking  fund  burden  of  the  $10,- 
000,000,000  is  deducted,  it  leaves  an  annual  per  capita 
burden  of  something  less  than  $10,  or  approximately  $2 
from  every  $100  income.  In  other  words,  the  actual  an- 
nual burden  of  indebtedness  on  the  people  of  the  United 
States  amounts  to  a  little  less  than  2  per  cent  of  the 
national  income. 

This  charge  may  appear  large  to  a  people  that  has  been 
accustomed  to  practically  no  debt  burden,  but  it  sinks 
into  insignificance  when  it  is  compared  with  the  burden 
that  the  debt  of  other  countries  is  placing  upon  their 
citizenship.  The  debt  of  Great  Britain  is  about  $36,- 
000,000,000,  or  a  per  capita  burden  of  about  $780.  Her 
national  wealth  is  somewhere  around  $120,000,000,000, 
with  a  national  income  of  about  $15,000,000,000.  This 
means  an  annual  interest  charge  of  about  $10  out  of  every 
$100  income,  or  what  would  be  equivalent  to  a  10  per 
cent  income  tax  on  the  entire  national  income.  Great 
Britain,  however,  has  loaned  about  $5,000,000,000  to  her 
allies,  the  payment  of  which  would  lower  proportionately 
her  burden. 

The  burden  upon  France  and  Germany  is  still  more 
startling,  while  that  upon  Italy  is  somewhat  less.  France 


412 


OUTLINES  OF  PUBLIC  FINANCE 


has  a  debt  about  the  size  of  that  of  Great  Britain,  but  with 
a  national  wealth  only  about  three  fourths  as  large,  and 
an  annual  income  about  four  fifths  as  large.  This  makes 
her  per  capita  debt  between  $900  and  $1,000,  with  about 
$15  out  of  every  $100  of  her  income  needed  to  meet  the 
interest  charge.  Germany's  debt  is  something  less  than 
$40,000,000,000,  her  wealth  between  $75,000,000,000  and 
$80,000,000,000,  and  her  income  something  over  $10,- 
000,000,000.  This  makes  her  per  capita  indebtedness 
about  $600,  while  the  annual  charge  requires  nearly  $20 
out  of  every  $100  income.  Italy's  per  capita  debt  is  ap- 
proximately $350,  and  the  annual  burden  about  $7.50 
out  of  every  $100  income. 

These  figures  will  hold  as  approximately  correct  for  the 
middle  of  1919,  when  the  indebtedness  of  most  countries 
had  reached  its  maximum.  The  relative  status  of  the 
various  countries  under  consideration  may  be  gained 
readily  from  a  glance  at  the  computations  in  the  following 
tabulated  form.  A  few  other  calculations  have  been 
added  because  they  show  interesting  comparisons. 

INDEBTEDNESS  CONDITION  OF  IMPORTANT  COUNTRIES  l 


Country 

Debt 
in 
Billions 

Per 
Capita 
Debt 

Wealth 
in 
Billions 

Income 
in 
Billions 

Per 

Capita 
Income 

Burden 
on 
$100 
Income 

Per 
Capita 
Interest 
Charge 

United  States.  . 
Great  Britain.  . 
France      .  . 

$24 
36 
36 

$225 
780 
900  + 

$275-300 
120 
90 

$60 
15  + 
12 

$555 
335 
300 

$  1.50 
10.00 
15.00 

$  9.25 
34.25 
45  00 

Germany  

40— 

600+ 

75-80 

10 

205 

20.00 

30-00 

Italy   . 

12+ 

350 

40 

7+ 

155 

7.50 

15.25 

A  moment's  reflection  upon  these  figures  causes  one  to 
realize  the  pressing  burden  of  indebtedness  which  rests 
upon  these  countries,  especially  the  European  nations. 
It  must  be  remembered,  too,  that  only  the  national  in- 
debtedness has  been  considered,  and  that  the  minor  polit- 

1  These  figures  are  taken,  very  largely,  from  a  booklet  published  in  1919 
by  the  Bankers  Trust  Company. 


PUBLIC  INDEBTEDNESS  413 

ical  divisions  generally  have  a  heavy  debt  charge  of  their 
own.  This,  added  to  the  enormous  interest  charge,  makes 
the  total  burden  of  public  indebtedness  so  large  that  it 
can  be  materially  lessened  only  after  a  considerable  lapse 
of  time. 

ADDITIONAL   READING 

Adams,  Public  Debts. 

Bankers  Trust  Company,  Our  Public  Debt. 


CHAPTER  XVIII 

THE   ADMINISTRATION    OF   PUBLIC   FUNDS 

210.  The  Importance  of  Proper  Fiscal  Administration 
Sas  Been  Underestimated. — Previous  chapters  have  indi- 
cated that,  during  the  first  stages  of  the  development  of 
fiscal  systems,  the  question  of  revenue  was  of  greatest 
concern.  Gradually,  consideration  has  been  directed  to 
the  use  to  which  the  funds  were  put,  until  fiscal  students 
have  become  much  concerned  about  public  expenditures. 
A  third  important  phase  of  public  funds — their  adminis- 
tration— has  been  recognized  only  recently  as  being  of 
any  particular  consequence.  It  is  true  that  in  the  very 
early  development  of  fiscal  systems  much  attention  was 
given  to  methods  for  handling  revenues  and  expenditures. 
As  the  pressure  for  funds  became  more  pronounced,  how- 
ever, attention  became  concentrated  on  sources  of  rev- 
enue, while  little  was  thought  or  said  concerning  the  man- 
agement of  the  public  funds.  It  is  only  recently  that  the 
importance  of  this  aspect  has  again  begun  to  receive  due 
consideration. 

Various  factors  have  caused  modern  fiscal  students  to 
emphasize  the  importance  of  the  proper  administration 
of  public  funds.  Expenditures,  in  numerous  political 
divisions,  have  become  so  large  that  the  burden  of  the 
revenue  charge  is  felt  keenly.  Many  political  units  have 
reached  the  limit  of  indebtedness,  as  well  as  the  maximum 
tax  rate,  while  a  scarcity  of  funds  still  exists.  Under  such 
conditions  the  question  naturally  arises  whether  the  rev- 
enues and  expenditures  have  been  properly  handled.  The 
increased  emphasis  which  has  been  placed  recently 


THE  ADMINISTRATION  OF  PUBLIC  FUNDS      415 

proper  methods  of  accounting  in  private  business  enter- 
prises, has  no  doubt  stimulated  interest  in  the  handling 
of  public  funds.  A  modern  business  firm  keeps  in  close 
touch  with  revenues  and  expenditures  through  its  skilled 
accountants,  and  because  of  this  demand  the  importance 
of  the  accounting  profession  has  increased  many  tunes. 
Since  this  close  management  has  proved  so  beneficial  to 
private  enterprise,  many  have  seen  the  need  for  a  similar 
policy  in  handling  public  funds.  The  continual  increase 
in  the  number  of  charges  of  graft  and  misappropriation 
of  funds  on  the  part  of  fiscal  officials  has  no  doubt  been 
an  important  factor  in  leading  citizens  to  demand  a 
stricter  account  of  the  services  which  these  officials  ren- 
der. It  is  the  purpose  of  this  chapter  to  indicate  some  of 
the  deficiencies  in  methods  that  have  been  used  in  han- 
dling public  funds,  and  to  suggest  some  improvements. 

211.  The  Administration  of  Public  Funds  Should  Har- 
monize with  Other  Institutions. — When  the  amount  of 
funds  which  fiscal  officials  handled  was  small,  the  method 
in  which  they  were  administered  was  of  little  concern  to 
others  than  the  officials.  As  the  amount  of  funds  began 
to  increase  with  the  gradual  extension  of  government  ac- 
tivity, it  became  quite  possible  that  the  method  of  han- 
dling the  funds  would  be  of  interest  to  others  than  the 
officials  into  whose  hands  the  funds  were  placed. 

Adam  Smith's  axiom  that  taxes  should  be  paid  at  a  time 
when  it  was  most  convenient  is  worthy  of  consideration. 
In  the  supply  of  capital  there  are  seasons  of  scarcity  and 
seasons  of  plenty.  It  is  indicative  of  poor  judgment  on 
the  part  of  the  fiscal  officials,  if  the  collection  of  revenue 
is  so  arranged  that  the  time  for  its  payment  comes  when 
the  contributor  is  least  able  to  meet  it — that  is,  at  the 
season  when  money  is  already  scarce.  If  such  an  arrange- 
ment exists,  it  will  mean  a  still  greater  strain  upon  bank 
reserves  than  what  would  nominally  occur,  with  a  corre- 
sponding raise  in  the  discount  rate.  If,  on  the  other  hand, 
fiscal  officials  so  arrange  that  substantial  payments  by 


416  OUTLINES  OF  PUBLIC  FINANCE 

the  government  are  made  at  times  when  money  is  already 
plentiful,  the  difficulties  of  a  cheap  money  are  increased 
by  such  action.  In  the  formulation  of  fiscal  plans,  more- 
over, the  possible  effects  on  individual  industries  have  not 
always  been  given  due  consideration. 

Many  illustrations  of  these  difficulties  have  occurred  in 
the  revenues  and  expenditures  of  various  political  units. 
One  of  the  outstanding  examples,  however,  has  been  in 
the  fiscal  machinery  of  the  Federal  government.  In  the 
establishment  of  the  first  and  second  United  States  banks 
consideration  was  given  to  their  ability  to  aid  individual 
enterprise.  President  Jackson  went  to  the  extreme  in 
using  the  government  funds  for  the  aid  of  general  indus- 
try when  he  distributed  them  among  the  banks  of  his 
choice.  The  resulting  speculation,  followed  by  the  panic 
of  1837,  led  to  the  adoption  of  the  independent  treasury 
system.  The  system  was  not  put  into  actual  operation 
until  1847,  and  has  since  remained  in  some  form. 

The  Independent  Treasury. — The  original  intention  of 
the  plan  of  the  independent  treasury  was  to  keep  all  the 
funds  of  the  government  in  this  treasury  or  the  sub- 
treasuries  for  which  provision  was  made.  The  chief  diffi- 
culty with  this  arrangement  was  that  large  sums  of  capi- 
tal, which  might  otherwise  have  been  used  as  the  basis  for 
bank  credit,  or  for  productive  enterprise,  were  held  in  the 
vaults  of  the  government  until  they  were  needed  to  meet 
some  obligation.  These  payments  were  of  course  at  ir- 
regular intervals,  and  frequently  had  a  noticeable  effect 
on  the  money  market.  After  some  years  the  Secretary  of 
the  Treasury  was  authorized  to  make  deposits,  under  cer- 
tain conditions,  with  national  banks.  Such  deposits  were 
made  at  the  discretion  of  the  Secretary,  and  the  opinions 
of  all  Secretaries  were  not  the  same,  nor  could  a  definite 
policy  of  any  particular  one  be  relied  upon. 

The  result  has  been  an  element  of  uncertainty  in  the 
banking  system  and  in  the  money  market.  It  could  not 
be  foreseen  just  what  policy  would  be  followed  by  the 


THE  ADMINISTRATION  OF  PUBLIC  FUNDS      417 

Secretary  of  the  Treasury.  Banks  did  not  know  whether 
to  anticipate  deposits  or  withdrawals.  There  was  no  law 
which  regulated  these  activities,  and  the  practice  was  so 
diverse  that  no  definite  action  could  be  anticipated.  As 
there  has  been  no  uniformity  in  the  receipts  and  disburse- 
ments of  the  government  from  year  to  year,  or  from 
month  to  month,  so  there  has  always  been  more  or  less 
uncertainty  as  to  how  banks  and  other  industries  would 
be  affected  by  these  variations  in  the  operation  of  the 
treasury.  The  result  has  been  a  constant  speculation 
among  banks  as  to  what  the  action  of  the  Secretary  of  the 
Treasury  would  be.  The  Secretary  has  been  hi  no  way 
connected  with  the  banks  or  other  industries,  yet  has  had 
control  over  a  factor  which  vitally  affected  their  wrelfare 
— a  situation  under  which  it  has  been  impossible  to  ex- 
pect satisfactory  cooperation.  The  independent  treas- 
ury system  still  exists,  but  it  has  sunk  into  insignificance 
to  such  an  extent  since  the  adoption  of  the  Federal  Re- 
serve Banking  System  that  its  influence  is  scarcely  felt. 

212.  The  Expenditure  of  Federal  Funds  Is  Carefully 
Scrutinized. — In  the  establishment  of  the  Treasury  De- 
partment there  was  a  diversity  of  opinion  as  to  what  form 
it  should  take.  Many  felt  that  it  would  be  unwise  to  in- 
trust the  handling  of  the  nation's  finances  to  any  particu- 
lar individual,  and  contended  that  the  funds  should  be 
handled  by  a  commission.  Many  considered  that  it  would 
be  impossible  to  secure  a  man  who  would  be  honest 
enough  to  intrust  with  so  much  responsibility.  After 
much  debate  the  Treasury  Department  was  established 
under  one  head,  the  Secretary  of  the  Treasury.  Unlike 
other  departments,  this  department  is  independent  of  the 
control  of  the  President,  but  is  closely  allied  to  Congress. 
To  obtain  information  on  financial  matters,  Congress  may 
inquire  directly  of  the  Treasury  Department,  without  the 
consent  of  the  President. 

Organization  of  Treasury  Department. — The  internal  or- 
ganization of  the  Treasury  Department  was  carefully 


418  OUTLINES  OF  PUBLIC  FINANCE 

worked  out,  and  was  designed  to  be  a  system  of  checks. 
At  times  it  has  proved  rather  cumbersome.  Besides  the 
Secretary  there  was  to  be  appointed  an  assistant  Secretary, 
a  comptroller,  an  auditor,  a  treasurer,  and  a  register.  As 
the  business  of  the  department  expanded  it  became  neces- 
sary to  increase  the  number  of  some  of  these  officers,  and 
to  assign  particular  funds  to  their  jurisdiction.  It  is  the 
duty  of  the  comptroller  to  scrutinize  the  correctness  of  the 
accounts,  and  to  countersign  warrants  drawn  by  the  Sec- 
retary of  the  Treasury.  The  register  must  preserve 
vouchers  and  bills,  while  the  treasurer  sees  that  no  funds 
are  improperly  paid.  The  auditor  must  see  that  the 
accounts  are  properly  kept.  In  order  to  secure  funds 
from  the  United  States  Treasury,  it  is  first  necessary  that 
an  appropriation  be  made  by  Congress,  and  that  the  war- 
rant be  signed  by  the  Secretary,  countersigned  by  the 
comptroller,  and  recorded  by  the  register. 

Later  Modifications. — As  the  business  of  the  treasury 
expanded,  the  number  of  auditors  and  comptrollers  was 
increased,  and  a  portion  of  the  accounts  was  distributed 
to  the  different  branches.  To  use  all  the  checks,  however, 
which  were  first  intended,  began  to  prove  too  complex 
and  cumbersome.  In  1894  Congress  modified  the  system 
by  abolishing  all  the  comptrollers  except  one.  Such  de- 
tailed revisions  of  accounts  as  had  formerly  been  practiced 
were  also  modified.  There  now  are  six  auditors,  whose 
duties  are  divided  hi  the  following  manner:  the  first 
auditor  takes  care  of  the  accounts  of  the  Treasury  De- 
partment; the  second  auditor  handles  the  accounts  of 
the  War  Department;  the  third  auditor  handles  the  ac- 
counts of  the  Department  of  Interior;  the  fourth  auditor 
reviews  the  Navy  Department  accounts;  the  fifth  auditor 
is  concerned  chiefly  with  the  accounts  of  the  State  De- 
partment; while  the  sixth  auditor  looks  after  the  accounts 
of  the  Post  Office  Department. 

Under  the  present  arrangement  the  work  of  the  auditors 
is  not  reviewed  by  the  comptroller,  unless  he  has  reason 


THE  ADMINISTRATION  OF  PUBLIC  FUNDS      419 

to  question  it,  or  unless  some  claimant  makes  an  appeal 
which  necessitates  a  review.  The  comptroller  keeps  a 
record  of  congressional  appropriations,  and  on  the  basis 
of  these  appropriations  opens  a  credit  account  with  the 
various  departments  of  the  amount  of  funds  at  then1  dis- 
posal. Warrants,  when  properly  indorsed,  are  debited  to 
these  accounts,  and  it  is  one  of  the  duties  of  the  comptrol- 
ler to  see  that  warrants  are  not  drawn  hi  excess  of  the 
appropriations.  Claims  against  the  government  which 
the  Treasury  Department  refuses  to  recognize  may  be 
reviewed  in  the  Court  of  Claims,  or  carried  from  here  to 
the  Supreme  Court.  Recourse  may  also  be  had,  of  course, 
in  petitioning  Congress  against  any  decision  of  the  Treas- 
ury Department. 

There  has  been  little  question  as  to  the  integrity  of  the 
Treasury  Department,  while  the  system  of  checks,  cum- 
bersome and  time-consuming  as  it  often  is,  has  served  the 
purpose  for  which  it  was  intended.  The  funds  of  the 
government  are  closely  guarded,  and  warrants  are  paid 
only  to  those  who  are  expected  to  receive  funds.  It  has 
not  been  deemed  necessary,  as  in  a  number  of  countries, 
to  have  the  accounts  of  the  department  audited  by  a  legis- 
lative committee.  Such  an  experiment  was  tried  by  the 
House  of  Representatives  in  the  early  years  of  the  depart- 
ment, but  was  not  continued.  The  fact  that  the  depart- 
ment officials  may  be  called  upon  at  any  tune  to  make  a 
report  to  Congress,  or  may  be  subject  at  any  time  to  an 
investigation  of  then*  affairs,  has  seemed  to  maintain  the 
efficiency  and  integrity  of  the  department  at  a  compara- 
tively high  level.  An  avenue  is  left  open  to  fraud,  how- 
ever, which  would  be  difficult  to  detect  under  the  present 
arrangement. 

213.  Revenues  and  Expenditures  Should  Be  Closely 
Correlated. — The  fact  that  some  close  relation  should 
exist  between  a  government's  expenditures  and  revenues 
seems  too  obvious  to  mention.  Yet  fiscal  officials  have 
often  lost  sight  of  this  first  principle  of  sound  financiering. 


420  OUTLINES  OF  PUBLIC  FINANCE 

Funds  have  often  been  voted  in  excess  of  ordinary  rev- 
enues, and  without  knowledge  as  to  where  revenue  could 
be  obtained.  Revenues,  on  the  other  hand,  have  fre- 
quently exceeded  the  anticipated  expenditures — a  situa- 
tion which  usually  leads  to  the  squandering  of  public 
funds.  The  most  common  arrangement  for  a  proper  co- 
ordination of  expenditures  and  revenues  has  been  through 
the  use  of  some  form  of  a  budget  system. 

Meaning  of  Budget. — The  term  "budget"  has  no  fixed 
general  meaning.  Its  origin  is  probably  from  the  Latin, 
bulga,  meaning  bag  or  purse.  In  the  middle  of  the  eight- 
eenth century,  when  the  Chancellor  of  the  Exchequer  in 
England  made  his  speech  on  the  finances,  he  took  his 
accounts  from  a  brugette  (French  for  bag).  Thereafter  the 
term  budget  was  applied  to  this  speech.  A  little  later  it 
was  used  in  France  to  denote  an  estimate  of  receipts  and 
expenditures.  In  some  cases  it  is  practically  synonymous 
with  revenue  and  appropriation  legislation. 

A  comprehensive  budget  system,  however,  should  in- 
clude more  than  this.  It  should  be  a  definte  plan  to 
include  all  the  fiscal  operations  of  a  government  for  a 
specified  time.  It  may  involve  different  features,  one 
logically  following  the  other.  A  comprehensive  budget 
system,  for  example,  might  comprise,  as  an  initial  measure, 
a  careful  estimate  of  expenditure  and  revenues  by  some 
competent  authority.  These  estimates  should  be  given 
the  sanction  of  the  legislative  body  through  their  incor- 
poration into  appropriation  and  revenue  bills.  Provision 
should  be  made  for  the  execution  of  the  plan  under  legal 
direction,  while  checks  should  be  provided  through  proper 
auditing  and  accounting  methods.  The  fiscal,  systems  of 
some  countries  possess  some  of  these  features  and  omit 
others,  while  the  officers  to  which  the  administration  is 
given  in  different  countries  are  likewise  not  always  the 
same.  For  this  reason  mere  reference  to  a  budget  system 
is  unintelligible. 

The  citizenship  of  a  state  has  a  right  to  demand  the 


THE  ADMINISTRATION  OF  PUBLIC  FUNDS      421 

most  capable  management  of  public  funds.  Government 
expenditures  necessarily  mean  public  burdens.  The  more 
the  funds  are  squandered,  the  greater  are  the  burdens 
upon  the  citizens  in  proportion  to  the  rendition  of  the 
services  for  which  the  state  was  formed — that  is,  the 
things  which  can  be  done  more  efficiently  by  a  collective 
organization  than  by  individuals.  The  use  of  a  budget — 
a  systematic  administration  of  revenues  and  expenditures 
such  as  that  outlined  above — should,  therefore,  be  de- 
manded by  every  citizen  hi  order  to  make  his  government 
susceptible  to  intelligent  popular  control  and  responsi- 
bility, and  so  that  each  taxpayer  may  know  where  and 
why  he  is  paying. 

214.  England  Has  Done  Much  to  Systematize  Her  Fis- 
cal Operations. — Great  Britain  has  worked  out  a  more 
detailed  system  for  handling  her  fiscal  operations  than, 
perhaps,  any  other  country,  and  her  system  has  been 
adopted  almost  in  its  entirety  by  India  and  Egypt.  Be- 
cause of  the  degree  of  perfection  which  is  found  hi  this 
organization,  and  because  of  the  influence  it  has  had  m 
the  formulation  of  other  fiscal  programs,  it  deserves  a 
somewhat  detailed  exposition. 

Formation  and  Passage  of  Budget. — The  British  fiscal 
year  begins  April  1st.  Each  year  is  complete  in  itself,  and 
no  appropriations  hang  over  from  one  year  to  the  next. 
The  various  departments  of  the  government  make  esti- 
mates of  expenditures  which  form  the  basis  for  the  figures 
of  the  Treasury  Department.  These  estimates  are  made 
up  at  the  request  of  the  Treasury  Department  about 
December  1st.  They  are  then  compiled  and  reviewed  by 
the  Chancellor  of  the  Exchequer,  who  has  the  power  to 
reduce  them.  Should  the  Chancellor  not  agree  with  the 
Treasury  Department,  appeal  is  made  to  the  Prime  Minis- 
ter as  arbitrator. 

With  the  list  of  revenues  which  has  been  prepared  by 
the  Treasury  Department,  a  balancing  of  possible  receipts 
and  expenditures  is  undertaken.  The  result  is  some  well- 


422  OUTLINES  OF  PUBLIC  FINANCE 

formulated  plan — one  which  usually  makes  provision  for 
a  rather  large  surplus.  It  then  becomes  the  duty  of  the 
King  to  lay  the  proposed  fiscal  scheme  before  Parliament. 
The  estimates  are  printed  in  well-organized  and  summa- 
rized form,  and  placed  in  the  hands  of  each  member  of 
Parliament,  where  it  becomes  the  duty  of  the  Prime 
Minister  to  pilot  the  bill,  while  its  various  items  are  de- 
fended by  the  Chancellor,  who  is  a  member  of  the  House 
of  Commons.1 

The  various  divisions  of  the  budget,  usually  about  one 
hundred  and  forty  hi  number,  are  acted  upon  by  the  House 
as  a  committee  of  the  whole.  Each  section  is  discussed 
and  voted  on.  Items  may  be  reduced  but  cannot  be 
increased  except  under  closely  restricted  conditions. 
Much  debate  marks  the  discussion  of  these  items,  and  fre- 
quently wanders  far  afield  from  the  subject  of  the  budget. 
After  the  bills  have  been  made  acceptable  to  the  com- 
mittee, they  are  passed  in  Parliament  proper,  under  the 
title  of  the  Consolidated  Fund  Act;  this  is  usually  ac- 
complished before  the  end  of  the  fiscal  year.  The  pas- 
sage of  the  appropriation  measure  is  followed  later  by  a 
finance  Act  which  levies  the  taxes  for  the  year. 

Classes  of  Expenditures  and  Revenues. — The  expendi- 
tures of  the  United  Kingdom  are  of  two  kinds,  permanent 
appropriations  and  supply  appropriations.  The  former 
need  not  be  voted  year  after  year,  but  have  been  voted  to 
continue  until  the  Act  under  which  they  are  authorized  is 
repealed.  Examples  of  expenditures  of  this  nature  are 
those  for  the  sinking  fund,  pensions,  debt  charge,  courts, 
and  the  civil  list.  The  supply  appropriations,  however, 
must  be  voted  repeatedly,  and  contain  such  items  as  the 
appropriations  for  the  army  and  navy,  revenue  depart- 
ment, post  office,  railroads,  and  the  civil  service.  Such  an 
arrangement  not  only  simplifies  the  budget  preparation, 
but  makes  it  possible  to  concentrate  attention  on  the  more 

1  Army  and  navy  bills  are  defended  by  representatives  from  these  de- 
partments. 


THE  ADMINISTRATION  OF  PUBLIC  FUNDS      423 

difficult  and  fluctuating  items,  while  it  tends  to  give  a 
feeling  of  security  to  activities  undertaken  by  the  state. 

The  revenue  is  likewise  of  two  kinds,  one  permanent, 
and  the  other  provided  for  currently.  About  three  fourths 
of  the  entire  revenue  comes  in  the  first  class,  so  that  it  is 
necessary  to  provide  in  the  finance  bill  the  amount  above 
this  which  is  required  to  meet  the  needs  of  the  appropria- 
tions bill,  or  about  one  fourth  of  the  total  amount.  These 
estimates  of  expenditures  and  receipts  are  so  closely  an- 
ticipated that  the  actual  amounts  do  not  usually  vary 
more  than  2  per  cent  from  the  expectations.  The  funds 
are  placed  in  the  Bank  of  England,  and  are  at  the  control 
of  the  comptroller  and  auditor-general. 

In  England's  fiscal  machinery  it  is  seen  that  absolute 
responsibility  for  the  success  of  the  budget  rests  in  the 
ministry.  The  finance  minister  has  a  seat  in  the  legisla- 
tive body,  which  hi  turn  has  complete  control  over  ex- 
penditures. Another  interesting  feature  is  that  one  branch 
of  the  legislative  assembly  has  practically  the  entire  con- 
trol over  the  budget.  No  doubt  the  marked  centralization 
of  control  over  the  fiscal  system  has  had  much  to  do  with 
the  success  of  the  system. 

215.  Many  European  States  Use  a  Form  of  Budget. — 
England  must  be  given  the  credit  for  having  the  most 
systematic  fiscal  scheme,  yet  many  of  the  systems  of  the 
continental  states  have  made  an  approach  toward  an 
orderly  arrangement  of  their  fiscal  machinery.  Space  will 
be  taken  only  to  give  the  bare  outlines  of  two  of  the  better 
organized  systems. 

The  German  Fiscal  Plan. — In  Germany,  before  the  war, 
the  budget  estimates  originated  in  much  the  same  manner 
as  in  the  English  system.  A  set  of  estimates  was  made  up 
by  local  and  provincial  authorities  and  turned  into  the 
hands  of  the  general  treasury,  where  an  attempt  was  made 
to  eliminate  any  difficulty.  It  was  the  duty  of  the  Im- 
perial Chancellor  to  act  as  arbitrator  if  necessary.  The 
Various  estimates  were  of  minute  detail,  and  were  first 


424  OUTLINES  OF  PUBLIC  FINANCE 

voted  upon  by  the  upper  chamber  of  the  government. 
Army  and  navy  appropriations  were  for  a  period  of  seven 
years,  while  all  established  institutions  were  assured  of 
continued  support.  The  question  of  funds  for  current  ex- 
penditures was,  therefore,  the  one  around  which  discus- 
sion centered.  If  the  system  is  continued  under  the  new 
governmental  regime  it  can  doubtless  be  made  more  satis- 
factory, since  the  former  Emperor  granted  very  limited 
powers  to  the  fiscal  authorities. 

French  Fiscal  Plan. — Under  the  French  system  the  esti- 
mates are  much  less  accurate  than  those  in  England. 
Here  the  fiscal  year  coincides  with  the  calendar  year, 
while  the  estimates  are  made  a  full  year  in  advance  of  the 
actual  expenditures.  With  the  lapse  of  a  year  between 
the  time  an  estimate  is  made  and  the  time  it  goes  into 
effect,  it  is,  of  course,  impossible  to  have  a  close  estimate. 
The  budget  is  prepared  by  the  Treasury  Department,  but 
the  Minister  of  Finance  has  much  less  power  in  modifying 
the  estimates  than  has  the  English  Chancellor. 

After  the  Minister  of  Finance  has  compiled  the  estimates 
in  presentable  form,  they  go  to  the  Chamber  of  Deputies. 
Here  the  budget  takes  the  form  of  a  bill,  with  schedules 
authorizing  certain  expenditures.  The  bill  is  prepared 
by  a  joint  committee  from  the  two  houses,  which  fre- 
quently pays  little  attention  to  the  estimates  which  have 
been  submitted.  After  much  time  has  been  consumed 
here,  the  bill,  with  its  seven  or  eight  hundred  chapters,  is 
presented  to  the  Chamber  of  Deputies,  where  each  chap- 
ter is  discussed  and  voted  upon  separately.  Motions  for 
changes  may  be  made  by  any  member,  and  because  of  the 
lack  of  any  centralized  responsibility,  much  extravagant 
expenditure  results.  The  President  cannot  veto,  but  may 
suggest  a  reconsideration  of  the  items. 

An  estimate  of  the  revenues  forms  a  part  of  the  budget. 
The  major  part  of  these  comes  from  indirect  taxes.  As 
might  be  expected,  since  such  a  long  period  elapses  before 
the  estimates  are  put  into  effect,  it  frequently  becomes 


THE  ADMINISTRATION  OF  PUBLIC  FUNDS      425 

necessary  to  pass  additional  and  special  budget  Acts. 
This  necessity  is  alleviated  somewhat  by  the  practice  of 
transferring  funds  from  one  purpose  to  another  within  the 
various  departments,  although  they  are  not  transferred 
between  departments.  These  difficulties,  however,  show 
the  evil  consequences  of  having  the  estimates  and  expend- 
itures so  widely  separated  in  point  of  time.  The  real 
administration  of  the  budget  and  the  auditing  of  the  ac- 
counts is  under  the  control  of  a  committee  of  accounts. 

216.  The  Fiscal  Machinery  of  Canada  Resembles  That 
of  England. — The  influence  of  the  Mother  country,  as 
might  be  expected,  is  clearly  discernible  in  the  fiscal  sys- 
tem of  Canada.  Estimates  are  prepared  by  the  Ministers 
of  the  departments  and  presented  to  the  Minister  of 
Finance.  Changes  are  made,  if  considered  necessary,  by  a 
conference  with  the  Minister  of  the  department  concerned. 
After  the  budget  has  met  the  approval  of  the  Cabinet, 
the  Minister  of  Finance  presents  it  to  the  House  of  Com- 
mons, where  items  may  be  reduced,  but  not  increased. 
Since  the  Cabinet  belongs  to  the  dominant  party  in  the 
House,  the  bill  usually  goes  through  with  comparatively 
little  difficulty.  It  is  quite  evident  that  the  system  closely 
resembles  the  English  practice  of  centralization  and  Cabi- 
net responsibility. 

Of  the  entire  appropriations  in  the  Canadian  budget, 
about  three  eighths  are  permanent.  Some  of  the  more 
important  appropriations  in  this  class  are  for  debt 
charges,  collection  of  revenue,  court  maintenance,  and 
salaries.  If  it  becomes  necessary  to  maintain  existing 
institutions,  and  the  House  has  failed  to  pass  the  budget, 
the  Governor-General  is  empowered  to  issue  special  war- 
rants for  expenditures  to  meet  the  needs. 

The  subject  of  revenues  arises  after  a  decision  has  been 
reached  on  the  appropriation  part  of  the  budget.  The 
House  goes  into  a  committee  on  ways  and  means  for  this 
purpose,  and  the  finance  Minister  presents  the  plan  for 
raising  revenues.  The  most  important  sources  of  revenue 


426  OUTLINES  OF  PUBLIC  FINANCE 

are  customs  duties,  excise  taxes,  the  sale  of  public  lands, 
and  the  post  office.  Tariff  Acts  are  frequently  passed 
outside  of  budgetary  consideration,  while  Acts  authoriz- 
ing the  borrowing  of  funds  usually  have  nothing  to  do 
with  the  budget.  The  expenditures  are  controlled  by  the 
auditor-general,  who  makes  an  annual  report  to  Parlia- 
ment. A  careful  study  of  the  report  aids  in  securing  more 
successful  fiscal  legislation  for  the  ensuing  year. 

217.  Budget  Development  in  the  United  States  Has 
Been  Toward  an  Unsystematic  System. — The  above  out- 
lines of  different  budgetary  systems  has  been  given  to 
indicate  the  tendency  toward  a  systematic  procedure  in 
arriving  at  expenditures  and  revenues.  The  same  tend- 
ency exists  in  many  other  countries.  In  the  United 
States,  however,  as  a  brief  historical  review  of  our  fiscal 
system  will  show,  the  development  has  been  away  from 
systematic  estimates  of  revenues  and  expenditures. 

Ideas  of  Early  Officials. — The  evidence  is  strong  that 
the  founders  and  early  leaders  of  our  government  had  in 
mind  the  establishment  of  a  fiscal  system  very  similar  to 
the  one  used  in  England.  Under  the  government  by  the 
Articles  of  Confederation,  committees  were  appointed  for 
the  purpose  of  making  estimates  of  the  expenditures. 
From  what  can  be  gathered  from  the  debates  over  fram- 
ing the  Constitution,  it  appears  certain  that  some  such 
system  as  the  English  was  intended  to  be  incorporated  in 
our  basic  law.  The  Constitution  includes  in  the  duties  of 
the  President,  "to  give  Congress  information  on  the  state 
of  the  Union,  and  to  recommend  to  its  consideration 
such  measures  as  he  shall  judge  necessary  and  expedient." 
The  people,  moreover,  are  given  control  over  the  Federal 
revenues  and  expenditures.  This  safeguard  is  shown  in 
such  provisions  as  the  following:  "No  money  shall  be 
drawn  from  the  treasury  but  in  consequence  of  appro- 
priations made  by  law."  "All  bills  for  raising  revenue 
shall  originate  in  the  House  of  Representatives,  but  the 
Senate  may  propose  or  concur  with  amendments."  "A 


THE  ADMINISTRATION  OF  PUBLIC  FUNDS      427 

regular  statement  and  account  of  the  receipts  and  expend- 
itures of  all  public  money  shall  be  published  from  time 
to  time."  While  all  the  details  of  the  fiscal  machinery 
were  left  to  be  provided  by  statute  or  custom,  it  seems 
probable  that  some  such  arrangement  as  was  used  in  Eng- 
land was  anticipated. 

At  the  very  beginning  the  House  of  Representatives 
went  into  a  committee  of  the  whole,  where  revenue  meas- 
ures were  discussed,  which  corresponded  to  the  English 
method  of  considering  such  measures.  The  relation  of 
the  Treasury  Department  to  Congress  was  made  very 
close,  and  the  law  which  established  the  department  made 
it  the  duty  of  the  Secretary  "to  prepare  and  report  esti- 
mates of  the  public  revenue  and  the  public  expenditures." 
Somewhat  later  an  Act  imposed  upon  the  Secretary  the 
duties  of  digesting,  preparing,  and  laying  before  Congress 
at  the  beginning  of  each  session  a  report  containing  esti- 
mates of  revenue  and  expenditures,  as  well  as  plans  for 
increasing  the  revenues.  The  intense  political  feeling 
kept  these  plans  from  being  fully  realized,  while  the 
President  neither  insisted  upon  any  constitutional  right 
to  present  administrative  proposals,  nor  accepted  the  re- 
sponsibility for  doing  so. 

Modification  of  Early  Plans. — It  was  not  long  after  the 
beginning  of  the  government  that  important  modifica- 
tions began  to  be  made.  In  1796  the  Ways  and  Means 
Committee  was  established  in  the  House  of  Representa- 
tives, with  the  right  to  initiate  fiscal  legislation.  Little 
administrative  initiative  existed  after  the  administration 
of  J.  Q.  Adams.  The  Cabinet  members  were  barred  from 
holding  seats  in  Congress.  Real  disintegration  of  au- 
thority began  in  1865,  when  the  Committee  on  Appro- 
priations was  appointed,  with  the  power  to  initiate  all 
expenditure  bills.  This  action  gave  the  power  over  rev- 
enues and  expenditures  to  two  separate  committees.  In 
1880  the  power  of  this  committee  was  curtailed  when  the 
Committee  on  Agricultural  Appropriations  was  formed, 


428  OUTLINES  OF  PUBLIC  FINANCE 

and  still  further  reduced  when  the  Rivers  and  Harbors 
Committee  was  created  a  few  years  later.  Further  dis- 
integration has  continued  to  the  present,  until  no  sem- 
blance of  centralized  responsibility  remains. 

The  Senate,  moreover,  has  so  developed  its  power  that 
it  practically  rewrites  revenue  bills  which  come  to  it  from 
the  House.  Decentralization  of  authority,  moreover,  has 
taken  place  in  the  Senate,  until  fiscal  bills  are  acted  upon 
by  a  number  of  committees  that  function  independently 
of  the  other  Senate  committees,  and  of  the  House  com- 
mittees. The  trend  in  the  United  States,  then,  has  been 
toward  a  decentralization  of  the  fiscal  machinery — the 
opposite  of  the  development  in  other  countries. 

218.  The  Present  Plan  of  Estimating  Revenues  and 
Expenditures  Is  Unsatisfactory. — It  is  instructive  to  know 
the  condition  which  has  resulted  from  the  fiscal  develop- 
ment which  we  have  just  traced.  The  Secretary  of  the 
Treasury  has  become  little  more  than  an  outlet  through 
which  reports  of  estimates  may  reach  the  House  of  Rep- 
resentatives. The  power  of  making  estimates  was  taken 
from  him  and  placed  in  the  hands  of  the  various  depart- 
ments, as  well  as  in  those  of  some  independent  establish- 
ments. It  then  became  the  duty  of  the  Secretary  to  re- 
cord these  estimates  in  the  "Book  of  Estimates,"  which 
he  transmitted  to  the  House.  Such  a  sweeping  decen- 
tralization of  power  soon  evidenced  its  weakness  in  that 
some  expected  estimates  were  not  made,  and  others  did 
not  take  the  proper  form,  and  it  became  necessary  to  em- 
power the  Secretary  to  see  that  all  estimates  were  made 
and  that  they  were  in  the  desired  form. 

Still  more  recent  legislation  has  conferred  upon  the 
Secretary  of  the  Treasury  the  duty  of  submitting  to  Con- 
gress an  estimate  of  receipts  and  expenditures  for  the 
current  and  ensuing  years.  It  is  now  his  duty,  as  soon  as 
estimates  of  expenditures  are  received,  to  make  an  esti- 
mate of  the  revenues  for  the  ensuing  year.  Should  the 
estimated  revenues  not  equal  the  estimated  needs,  it  be- 


THE  ADMINISTRATION  OF  PUBLIC  FUNDS      429 

comes  the  duty  of  the  President,  after  a  consideration  of 
all  the  estimates,  to  recommend  to  Congress  how  the  ap- 
propriations should  be  reduced  or  the  revenues  increased 
to  make  the  revenue  correspond  to  appropriations.  These 
are  steps  in  the  right  direction,  but  do  not  go  far  enough 
to  insure  centralized  responsibility. 

No  Budget  System. — The  budget  does  not  exist  in  the 
United  States  hi  the  sense  that  other  countries  use  it. 
About  September  of  each  year  the  various  spending  de- 
partments begin  to  make  estimates  for  the  year  to  com- 
mence the  next  July.  These  come  to  the  Secretary  of 
the  Treasury  to  be  transmitted  to  Congress  in  the  "Book 
of  Estimates."  The  estimates  of  the  various  departments 
are  usually  far  from  the  actual  needs.  Past  experience 
has  shown  that  Congress  is  likely  to  reduce  materially  the 
appropriations  from  the  estimates,  consequently  the  de- 
partments fortify  themselves  by  padding  their  require- 
ments. Under  such  a  situation  the  estimates  become  of 
little  value.  These  estimates  are  transmitted  to  the  House 
without  revision,  with  no  comparison  of  the  demands  of 
the  different  departments,  and  with  no  consideration  of 
the  possible  revenue.  As  already  indicated,  the  Secretary 
submits  separately  lists  of  estimated  revenues  and  ex- 
penditures, while  the  President  may  recommend  methods 
for  increasing  revenues  or  decreasing  expenditures.  Esti- 
mates may  also  come  from  army  engineers  and  from  the 
Court  of  Claims. 

Fiscal  Legislation. — The  actual  preparation  of  the  ap- 
propriation and  revenue  bills  really  begins  in  Congress 
before  or  at  the  time  the  "Book  of  Estimates"  is  received. 
About  fifteen  separate  committees  that  have  the  power  to 
originate  appropriations  exist  in  each  branch  of  Congress, 
each  working  separately  from  the  others,  and  independ- 
ently of  the  Secretary  of  the  Treasury.  Still  other  com- 
mittees can  make  demands  on  the  treasury.  Still  others 
have  power  over  the  revenues.  The  appropriation  and 
revenue  bills  may  be  under  the  process  of  formation  at 


430  OUTLINES  OF  PUBLIC  FINANCE 

the  same  time,  entirely  independent  of  each  other,  with 
nothing  for  guidance  but  past  bills.  The  personnel  of  the 
committees  is  often  not  exactly  what  is  desired  in  the 
consideration  of  such  problems.  Members  are  chosen  ac- 
cording to  the  lengths  of  term  in  Congress  by  a  regular 
system  of  promotion  rather  than  for  any  special  fiscal 
knowledge.  That  such  special  knowledge  is  often  not 
found  is  indicated  by  the  occupations  which  a  number  of 
the  committeemen  have  followed  before  taking  seats  hi 
Congress. 

The  reporting  of  an  appropriation  bill  from  its  commit- 
tee does  not  end  its  career.  It  is  next  placed  before  the 
House,  where  individual  members  may  propose  amend- 
ments. The  Senate  committee  on  the  same  subject  must 
have  its  turn  at  considering  it,  and  then  the  floor  of  the 
Senate.  It  is  fortunate  if  it  does  not  have  to  go  before 
an  adjustment  conference  committee  of  members  from 
each  House,  where  a  bill  is  framed  which  is  finally  adopted. 
It  is  evident  under  this  method  of  procedure  that  Con- 
gress initiates  as  well  as  ratines  appropriation  and  revenue 
bills.  The  House  no  longer  has  the  balance  of  power  in- 
tended by  the  Constitution,  while  bills  carrying  appro- 
priations are  strung  throughout  the  entire  session,  with 
little  consideration  as  to  the  source  of  funds.  The  revenue 
bill  usually  comes  up  late  in  the  session,  and  for  the  last 
few  years  has  not  been  sufficient  to  meet  the  appropria- 
tions. Deficiency  bills  have  been  used  to  make  up  the 
difference. 

Lack  of  Control  and  Responsibility. — The  control  of  Con- 
gress over  fiscal  administration  practically  ceases  with 
the  passage  of  the  appropriation  and  revenue  bills.  The 
system  of  control  over  payments  has  been  indicated. 
While  the  Secretary  of  the  Treasury  must  make  an  annual 
report  to  Congress,  no  action  is  taken  upon  it.  There  is 
a  committee  in  Congress  for  each  of  the  departments, 
which  has  jurisdiction  to  examine  the  reports  as  to  accu- 
racy and  conformity  to  the  appropriations.  Such  investi- 


THE  ADMINISTRATION  OF  PUBLIC  FUNDS      431 

gations  rarely  occur  unless  initiated  by  some  political 
motive.  The  Treasury  Department  has  been  remarkably 
free  from  suspicion,  hence  there  has  been  little  agitation 
for  a  systematic  auditing  of  accounts.  The  present  ar- 
rangement is,  of  course,  no  auditing  at  all,  for  there  can 
be  no  systematic  check  where  one  department  audits  its 
own  receipts  and  expenditures.  Even  though  the  various 
committees  did  avail  themselves  of  the  right  to  audit 
accounts,  no  verified  result  of  expenditures  and  revenues 
as  a  whole  could  be  obtained  from  the  nine  committees, 
the  work  of  which  would  not  be  related.  In  no  other 
country  does  there  exist  such  a  lack  of  restraint  upon  the 
Treasury  Department. 

The  one  outstanding  criticism  which  appears  from  this 
survey  of  the  Federal  fiscal  methods  is  the  lack  of  unity 
and  centralized  authority  from  beginning  to  end.  Appro- 
priation and  revenue  bills  arise  and  are  modified  in  hap- 
hazard ways,  and  with  no  one  really  responsible.  Such 
methods  cater  to  the  familiar  "pork  barrel  legislation. " 
Expenditures  which  will  please  the  constituency  of  the 
Senator  and  Representative  take  rank  of  first  importance, 
whether  nationally  desirable  or  not,  because  the  future 
support  is  desired.  These  "log  rolling"  practices  have  no 
doubt  been  responsible  for  the  waste  of  millions  of  dollars 
in  constructing  needless  Federal  buildings  and  in  "im- 
proving" rivers  and  harbors  where  rivers  and  harbors  can 
scarcely  be  found. 

Not  only  is  this  initial  waste  of  funds  apparent,  but  the 
nation  is  saddled  with  an  unnecessary  upkeep  charge  in 
providing  for  the  current  needs  of  these  institutions  of 
political  favoritism.  Yet  real  responsibility  for  the  many 
needless  expenditures  can  be  traced  to  no  one,  for  no  one 
in  particular  is  responsible.  The  lack  of  coordination  is 
further  emphasized  by  the  failure  of  Congress  to  exercise 
any  further  supervision  over  the  funds  after  passing  the 
bills  of  appropriations  and  revenue,  and  by  the  failure  to 
provide  some  intelligent  system  of  auditing  accounts  so 


432  OUTLINES  OF  PUBLIC  FINANCE 

that  it  could  be  determined  easily  how  much  money  is 
being  spent  and  for  what  purpose.  The  situation  as  por- 
trayed by  Secretary  Glass  was  that  "  Congress  votes  with 
a  lavish  hand  stupendous  sums,  conceived  in  a  magnificent 
spirit  of  generosity,  with  a  view  to  the  enhancement  of 
the  prestige  of  the  nation,  or  for  the  benefit  of  this  or  that 
element  in  the  community."  l 

2ig.  Much  Agitation  for  Budget  Reform  Has  Devel- 
oped.— The  evils  which  have  resulted  from  the  lack  of 
centralized  fiscal  control  and  corresponding  lack  of  re- 
sponsibility have  caused  much  demand  for  some  change. 
These  demands  began  to  take  definite  form  under  the 
administration  of  President  Taft.  He  was  instrumental 
in  securing  from  Congress  an  appropriation  of  $100,000 
for  the  purpose  of  making  investigations  into  the  efficiency 
of  the  various  executive  departments.  The  investigations 
were  made  by  ably  trained  men  who  composed  the  Com- 
mission on  Economy  and  Efficiency.  A  part  of  their 
report  attempted  to  show  the  need  for  a  budget  system, 
and  suggested  a  remodeling  of  the  fiscal  program  to  con- 
form to  a  real  budget  plan. 

The  President  made  an  attempt  to  have  our  fiscal  sys- 
tem remodeled,  but  at  this  time  both  the  Senate  and  the 
House  were  antagonistic  and  the  attempt  failed.  Much 
wholesome  publicity  had  been  gained,  however,  and  de- 
mands for  reform  have  continued  from  an  ever  increasing 
number  of  individuals  and  organizations.  Each  of  the 
important  political  parties  has  declared  in  its  platforms 
for  fiscal  reform,  which  has  been  unmistakable  in  the 
declaration  for  a  businesslike  budget.  It  has  been,  per- 
haps, only  the  more  pressing  problems  brought  on  by  the 
Great  War  which  have  delayed  the  expected  changes.  It 
is  not  too  much  to  expect  that,  in  the  near  future,  the 
widespread  demand  for  some  system  which  will  be  more 
efficient  and  economical  will  bear  fruit  through  some  form 
of  budgetary  procedure. 

1  Statement  before  a  Select  Committee  on  the  Budget. 


THE  ADMINISTRATION  OF  PUBLIC  FUNDS      433 

Suggestions  for  Reform. — Suggestions  as  to  the  exact 
form  our  budget  should  take  have  not  always  been  the 
same,  though  all  have  sought  to  centralize  responsibility. 
A  satisfactory  plan,  however,  should  provide  for  the  ac- 
complishment of  such  features  as  the  following.  The 
preparation  of  estimates  should  be  made  by  some  respon- 
sible member  of  the  executive  department,  perhaps  the 
President,  or  Secretary  of  Treasury.  The  estimate  should 
be  considered  by  Congress,  but  not  in  a  number  of  sep- 
arate and  independent  committees.  During  the  legisla- 
tive consideration  the  executive  responsible  for  the  recom- 
mendations should  be  called  upon  to  defend  his  proposals, 
and  changes  should  be  made  only  with  his  consent.  The 
proposal  should  be  made  early  hi  the  legislative  session, 
and  general  publicity  facilitated  in  every  possible  way. 
After  the  budget  has  been  voted  upon  by  Congress  it  is 
incumbent  upon  the  executive  department  to  execute  it 
properly.  In  the  performance  of  this  duty  it  should  be 
held  strictly  accountable  to  the  legislative  department. 

Such  provisions  as  these  have  been  embodied  in  a  num- 
ber of  bills  and  resolutions  which  have  been  before  Con- 
gress in  recent  sessions.  It  is  evident  that  the  proposals 
are  gaining  in  favor  on  their  own  merits,  as  well  as  because 
of  the  pressure  which  is  being  brought  by  outside  agencies, 
and  it  is  not  too  much  to  expect  that  some  form  of  budget 
procedure  will  be  in  operation  in  the  not  distant  future. 
Congress,  in  1920,  passed  a  law  which  provided  for  rather 
extensive  centralized  budgeting  machinery  for  Federal 
finances.  This  was  vetoed,  however,  by  President  Wilson, 
because  some  of  the  details  did  not  conform  to  his  ideas 
of  what  a  budget  system  should  be. 

Recent  Legislation. — Budgetary  legislation  was  one  of 
the  important  matters  acted  upon  by  the  Sixty-seventh 
Congress.  Under  the  leadership  of  Senator  McCormick 
a  budget  bill  passed  the  Senate  on  April  26,  1921,  and 
under  the  leadership  of  Representative  Good  a  similar 
bill  passed  the  House  on  May  5,  1921,  One  important 


434  OUTLINES  OF  PUBLIC  FINANCE 

difference  was  that  the  McCormick  bill  centered  respon- 
sibility in  the  Treasury  Department,  while  the  Good  bill 
centered  it  in  the  Executive  Department.  An  immediate 
conference  on  the  bills  was  arranged  so  that  the  new  sys- 
tem could  be  put  into  operation  at  the  beginning  of  the 
fiscal  year,  July  1,  1921.  The  conference  report  was 
adopted  May  27,  1921. 

The  McCormick-Good  budget  bill  provides  that  the 
President  shall  transmit  a  budget  to  Congress  on  the  first 
day  of  each  regular  session.  This  is  to  contain  estimates 
of  expenditures  and  appropriations  necessary,  in  his  judg- 
ment, for  the  support  of  the  government  for  the  ensuing 
fiscal  year.  He  is  to  send,  as  well,  an  estimate  of  the 
receipts  under  the  existing  laws  and  under  the  proposals 
made  by  him.  A  statement  of  expenditures  and  receipts 
for  the  previous  year  is  also  to  be  made.  The  condition 
of  the  Treasury  for  the  last  fiscal  year,  the  year  in  prog- 
ress, and  for  the  ensuing  year,  should  the  budget  be 
adopted,  as  well  as  all  essential  facts  regarding  indebted- 
ness, are  to  be  a  part  of  the  report.  Any  other  data  that 
will  depict  the  financial  conditions  of  the  government  may 
also  be  included.  Provision  is  also  made  for  the  trans- 
mission of  supplemental  or  deficiency  budgets. 

No  estimate  or  request  for  an  appropriation,  and  no 
request  for  an  increase  in  any  item  of  the  estimate,  and 
no  recommendation  as  to  how  the  revenue  needs  of  the 
government  shall  be  met  are  to  be  submitted  to  Congress 
or  any  congressional  committee  by  any  officer  or  employee 
of  any  department  or  establishment  unless  at  the  request 
of  either  house  of  Congress. 

The  plan  adopted,  however,  is  not  so  wholly  an  execu- 
tive budget  as  the  foregoing  statements  might  indicate. 
Section  207  of  the  law  creates  in  the  Treasury  Depart- 
ment the  bureau  of  the  budget.  It  is  to  consist  of  a  direct- 
or and  an  assistant  director,  appointed  by  the  President, 
with  salaries  of  $10,000  and  $7,500,  respectively.  This 
bureau,  under  such  regulations  as  the  President  may  pre- 


THE  ADMINISTRATION  OF  PUBLIC  FUNDS      435 

scribe,  is  to  prepare  the  budget  for  him,  as  well  as  any 
deficiency  budgets  that  may  be  needed.  It  has  the  power, 
further,  to  assemble,  correlate,  revise,  reduce,  or  increase 
the  estimates  of  the  several  departments  or  establishments. 

Modifications  are  also  made  in  the  accountancy  work  of 
the  Treasury  Department.  The  offices  of  Comptroller  of 
the  Treasury  and  Assistant  Comptroller  of  the  Treasury 
have  been  abolished,  and  in  their  place  has  been  substi- 
tuted a  Comptroller-General  and  an  Assistant  Comptrol- 
ler-General. A  general  accountancy  office  has  been  estab- 
lished which  is  independent  of  the  executive  departments, 
and  is  placed  under  the  direction  and  control  of  the 
Comptroller-General.  All  books,  accounts,  etc.,  are  to 
come  to  the  general  accountancy  department. 

Time  will  test  the  wisdom  of  some  of  the  provisions  of 
the  law,  such  as  the  combination  of  the  Executive  with 
the  Treasury  Department.  With  Congress  and  the  Presi- 
dent so  heartily  in  favor  of  budgetary  procedure,  there  is 
every  reason  why  a  marked  improvement  will  result. 
That  President  Harding  was  favorable  toward  budgetary 
legislation  is  indicated  by  the  following  quotation: 

I  need  not  emphasize  to  you,  gentlemen,  the  anomalous  situation  of 
the  government  heretofore  in  having  a  great  number  of  spending  com- 
mittees, apportioning  moneys  to  various  purposes,  without  any  study 
of  the  relationship  between  these  various  purposes,  and  regardless  of 
the  relationship  of  these  aggregated  spendings  to  the  revenue  in  sight. 
No  business,  no  humblest  household,  could  be  thus  conducted  without 
leading  into  disaster.  Establishment  of  a  budget  system  is  the  founda- 
tion upon  which  reorganization  must  be  based.  It  is  hardly  conceiv- 
able, indeed,  that  a  proper  budget  system  could  be  established  and 
carried  on  for  any  considerable  time  without  forcing  attention  to  the 
evils  and  effecting  the  reform  of  many  deficiencies  in  the  present 
system.1 

220.  The  Budget  System  of  Fiscal  Administration  Is 
Found  in  Many  American  States. — The  recommendations 
which  were  made  by  President  Taft's  Commission  on 

1  President  Harding,  in  a  speech  delivered  before  the  Academy  of  Polit- 
ical Science,  at  the  Hotel  Astor,  May  23,  1921. 


436  OUTLINES  OF  PUBLIC  FINANCE 

Economy  and  Efficiency  created  much  interest  among 
the  various  states,  and  soon  began  to  bear  fruit  in  these 
political  units,  although  the  report  was  not  adopted  by 
Congress.  The  question  of  the  budget  soon  acquired  an 
important  place  in  state  politics  and  became  a  plank  in 
many  party  platforms.  The  systematic  procedure  which 
the  budgetary  proposal  emphasized  presented  a  strong 
appeal  to  those  states  that  were  financially  embarrassed, 
and  many  states  quickly  legislated  some  form  of  budget 
into  law.  In  fact,  the  adoption  has  been  almost  too  rapid, 
for  frequently  the  plan  hit  upon  was  not  adapted  to  the 
needs  of  the  state,  or  did  not  give  the  desired  centralized 
responsibility.  So  rapid  was  the  principle  accepted,  that 
by  the  end  of  1919  there  were  less  than  half  a  dozen  states 
in  which  some  form  of  budget  had  not  been  adopted. 
In  some  cases,  of  course,  the  plan  was  very  unsatisfactory, 
but  it  represented  a  start  toward  more  efficient  fiscal 
management. 

Forms  of  State  Budgets. — While  the  budget  laws  of  the 
states  vary  greatly  in  their  requirements,  yet  it  is  possi- 
ble, in  a  general  way,  to  classify  them.  The  type  which 
has  been  most  in  favor  might  be  called  the  executive  bud- 
get. More  than  half  of  the  states  have  this  form,  and  it 
is  particularly  significant  that  really  all  budgets  which 
have  been  recently  adopted  have  been  of  this  type.  As 
indicated  by  the  name  given  to  this  class  of  budget,  the 
responsibility  is  placed  upon  the  Governor.  In  some  states 
a  designated  group  of  the  administrative  officers  is  made 
responsible  for  the  budget.  The  Governor  is  usually  made 
a  member  of  this  group.  Still  another  scheme  which  is 
used  to  some  extent  is  to  have  the  budget  prepared  by  a 
joint  committee  of  representatives  from  the  legislature 
and  administrative  officers.  In  two  or  three  cases,  more- 
over, the  responsibility  for  the  formation  of  the  budget  is 
placed  upon  a  legislative  committee. 

Maryland  Budget. — It  would  take  us  too  far  afield  to 
examine  the  details  found  in  the  budget  systems  of  the 


THE  ADMINISTRATION  OF  PUBLIC  FUNDS      437 

various  states.  As  an  example,  however,  of  a  compre- 
hensive executive  budget,  and  one  which  has  been  widely 
copied,  the  scheme  used  by  the  state  of  Maryland  deserves 
notice.  The  form  and  classification  of  all  estimates  are  to 
be  determined  by  the  Governor,  while  he  is  given  the 
power  to  revise  all  the  estimates  except  those  of  the 
legislature,  the  judiciary,  and  the  public  schools.  Two 
budgets  must  be  prepared,  one  for  each  of  the  two  suc- 
cessive years.  If  the  Governor  has  held  office  for  one  year 
the  budget  must  be  submitted  within  twenty  days  after 
the  opening  of  the  legislative  session.  If  he  has  not  held 
office  for  one  year,  he  is  given  thirty  days  to  submit  the 
budget.  The  budget  bill  is  presented  to  the  presiding 
officer  of  each  house  by  the  Governor,  and  these  officers 
are  required  to  introduce  it  immediately  to  their  respec- 
tive branches  of  the  legislature.  The  Governor,  however, 
and  such  administrative  officers  as  he  may  designate  have 
the  right  to  appear  and  be  heard  with  respect  to  the  bill 
at  any  time  it  is  under  consideration.  They  are  required, 
furthermore,  to  appear  at  the  request  of  either  branch  of 
the  legislature. 

The  Maryland  law  goes  farther  than  most  states  m 
limitations  upon  the  legislature  and  hi  the  details  which 
are  required  in  the  budget  bill.  No  amendments  may  be 
added  which  would  change  any  obligations  required  by 
the  constitution,  or  the  funds  for  public  schools.  The 
legislature  may  either  increase  or  decrease  items  which 
relate  to  the  judiciary  or  general  assembly.  All  other 
items  may  be  reduced  or  eliminated,  but  cannot  be  in- 
creased. No  special  appropriation  bill  can  be  considered 
until  the  general  budget  bill  has  been  finally  passed.  When 
special  appropriation  bills  arise  they  must  be  limited  to  a 
single  purpose,  while  the  bill  must  provide  some  form  of 
tax,  its  method  of  levy  and  collection,  for  the  purpose  of 
securing  the  necessary  revenue.  Such  bills  must  receive 
the  majority  vote  of  the  elected  members  of  each  legisla- 
tive branch,  and  are  subject  to  the  veto  of  the  Governor. 


438  OUTLINES  OF  PUBLIC  FINANCE 

The  items  in  each  of  the  budgets  presented  at  the  open- 
ing of  the  legislative  session  are  divided  into  two  parts — • 
those  for  governmental  appropriations  and  those  for  gen- 
eral appropriations.  The  governmental  appropriations 
contain  estimates  of  expenditures  for  the  general  assem- 
bly, executive  department,  the  judiciary,  principal  and 
interest  of  the  state  debt,  salaries  allowed  by  the  constitu- 
tion, and  other  purposes  sanctioned  by  the  constitution. 
All  other  estimates  fall  under  the  general  expenditures. 
The  bill,  moreover,  must  outline  a  definite  plan  for  all 
contemplated  expenditures  and  revenues,  and  show  how 
any  anticipated  surplus  or  deficit  of  funds  is  to  be  han- 
dled. The  bill  must  contain,  in  addition,  statements 
showing  revenues  and  expenditures  for  each  of  the  two 
preceding  years,  a  balance  sheet,  funds  and  debts,  an 
estimate  of  the  fiscal  condition  at  the  end  of  each  year 
covered  by  the  budget,  and  any  explanations  the  Governor 
may  wish  to  make. 

Other  States. — Many  states  have  not  gone  to  such  a 
degree  of  detail  as  is  found  in  Maryland;  in  others  the 
required  details  differ,  while  still  others  have  gone  even 
farther  in  the  reorganization  of  the  fiscal  department. 
Illinois  illustrates  one  of  the  best  examples  of  an  attempt 
to  reorganize  thoroughly  the  fiscal  machinery.  In  this 
state  all  administrative  offices,  except  two  elective  boards, 
and  those  provided  for  in  the  constitution,  are  consoli- 
dated into  nine  departments.  A  director,  appointed  by 
the  Governor,  with  the  approval  of  the  Senate,  heads  each 
of  the  departments.  The  finance  department  has  pro- 
vided for  a  uniform  system  of  accounting  to  be  used  in 
each  department.  It  examines  all  accounts  and  approves 
or  disapproves  all  vouchers.  A  list  of  the  anticipated  ac- 
tivities of  each  department,  together  with  their  estimated 
cost,  must  be  presented  to  the  finance  department  before 
appropriations  become  available.  This  department  is 
further  required  to  prepare  the  budget,  and  in  the  per- 
formance of  this  duty  is  given  extensive  investigating 


THE  ADMINISTRATION  OF  PUBLIC  FUNDS      439 

powers  to  enable  accurate  estimates  to  be  formed.  The 
budget  goes  from  this  department  through  the  Governor 
to  the  legislature,  upon  which  no  restrictions  have  been 
placed  as  to  rejecting  or  changing  the  items. 

Budgetary  procedure  in  the  states  has  been  of  too  short 
duration  to  draw  any  sweeping  conclusion  as  to  its  suc- 
cess in  accomplishing  the  desired  results.  As  might  be 
expected,  many  deficiencies  have  appeared  in  the  laws, 
which  a  little  time  and  experience  will  modify.  The  con- 
sensus of  opinion  is  that  the  use  of  the  system  has  been  a 
marked  success  and  is  saving  the  public  much  in  the  form 
of  taxes.  Whether  it  is  but  another  example  of  a  "new 
broom  sweeps  clean'7  remains  to  be  seen,  but  one  is  con- 
fident in  predicting  continued  favorable  results  from  such 
a  detailed  budget  as  the  Maryland  system,  and  such  cen- 
tral supervision  as  exists  in  Illinois. 

221.  The  Administration  of  Municipal  Finances  Is  Re- 
ceiving Much  Attention. — As  much  importance  has  been 
attached  to  the  proper  administration  of  municipal 
finances  hi  recent  years  as  to  that  of  any  political  division. 
A  number  of  circumstances  may  be  found  to  account  for 
this  situation.  Municipal  expenditures  have  increased 
more  rapidly  than  those  of  other  divisions.  The  increase 
has  been  more  rapid  than  the  growth  of  wealth  or  popula- 
tion, consequently  the  burden  has  been  increasing.  The 
gradual  expansion  of  the  tax  rate  was  viewed  with  appre- 
hension by  property  owners,  and  soon  they  began  to  inquire 
if  there  were  no  method  of  relief.  In  cities  where  the  tax 
rate  was  limited,  borrowing  was  resorted  to  until  the  limit 
of  indebtedness  was  reached,  when  the  difficulty  encoun- 
tered was  a  periodic  shortage  of  funds.  It  was  such  prob- 
lems as  these  which  led  the  public  to  demand  something 
better  in  the  methods  of  handling  municipal  funds.  This 
awakening  of  civic  interest  has  found  expression  in  the 
formation  of  civic  organizations,  such  as  bureaus  of 
municipal  research,  citizens7  unions,  and  national  associa- 
tions and  leagues,  such  as  the  National  Municipal  League. 


440  OUTLINES  OF  PUBLIC  FINANCE 

Municipal  Accounting. — One  of  the  first  demands  which 
the  aroused  citizenship  made  was  a  more  accurate  system 
of  accounting.  The  Bureau  of  the  Census  has  defined 
municipal  acounting  in  a  way  which  is  comprehensive 
and  complete.  It  says  that  it  is 

the  art  of  applying  accounts  as  aids  in  administration  of  business,  or 
the  science  of  analyzing,  recording,  and  summarizing  data  relating  to 
business  in  such  a  way  as  to  disclose  its  condition  or  state  at  any  time, 
to  express  the  results  of  its  operation  for  any  given  period,  and  to 
furnish  all  other  information  that  such  analyzing,  recording,  and  sum- 
marizing can  provide  for  its  systematic  and  most  successful  ad- 
ministration.1 

The  need  for  better  accounting  methods  was  evidenced 
by  the  laxity  which  generally  prevailed  in  handling 
municipal  finances  a  few  years  ago,  and  which  still  pre- 
vails in  many  cities.  Absolutely  no  uniformity  existed 
The  comptroller's  memory  was  often  the  only  record  of 
receipts  and  expenditures,  while  a  comparison  of  resources 
and  liabilities  could  not  be  made.  Comptroller  Metz  of 
New  York  City,  in  1909,  described  the  situation  which 
prevailed  in  a  large  number  of  cities.  He  said  that  "the 
comptroller  is  practically  helpless  to  protect  the  city  ex- 
cept there  be  a  reorganization  of  the  department  of  finance 
and  complete  revision  of  the  city's  administrative  and  ac- 
counting methods,"  and  that  by  hard  work  the  comptrol- 
ler has  been  able  to  "catch  a  few  things  here  and  a  few 
things  there,  but  the  mass  of  details  is  so  great  that  with 
all  the  vigilance  one  man  can  exercise,  the  city  treasury 
is  being  plundered  from  all  sides."  2 

One  organization  which  has  been  particularly  active  in 
securing  reform  in  methods  of  municipal  accounting  is 
the  Committee  on  Uniform  Municipal  Accounting  and 
Statistics,  which  was  organized  by  the  National  Munic- 

1  Special  Reports  of  the  Bureau  of  Census.     Statistics  of  Cities,  1908, 
p.  13. 

2  This  statement  was  made  in  an  address  before  the  City  Club  of  New 
York  in  1909. 


THE  ADMINISTRATION  OF  PUBLIC  FUNDS      441 

ipal  League.  It  is  the  duty  of  this  committee  to  investi- 
gate systems  of  accounting  used  in  different  cities,  and 
make  suggestions  which  will  increase  efficiency.  No  uni- 
form system  is  drawn  up  for  general  adoption,  because 
the  requirements  of  the  individual  cities,  while  similar, 
will  not  permit  of  the  exclusive  use  of  any  one  system. 
The  committee  aims  to  design  a  practicable  scheme  which 
will  meet  peculiar  individual  needs.  Many  other  organi- 
zations have  been  active  in  securing  the  same  results, 
while  the  favorable  response  from  the  cities  indicates 
that  they  are  entering  upon  an  era  of  more  efficient  fiscal 
administration. 

System  in  New  York  City. — New  York  City  furnishes  a 
good  example  of  a  city  with  a  thoroughly  reorganized 
accounting  system.  With  an  annual  expenditure  of  more 
than  $100,000,000,  the  need  for  systematic  fiscal  proce- 
dure is  apparent.  Before  the  reorganization  the  finance 
department  consisted  of  a  series  of  separate  jurisdictions, 
which  were  presided  over  by  practically  independent  divi- 
sion chiefs.  These  were  theoretically  responsible  to  the 
city  comptroller,  but  in  practice  each  exercised  complete 
control  in  his  district.  The  accounting  and  auditing  func- 
tions were  so  broken  up  that  one  department  found  itself 
forced  to  duplicate  records  kept  hi  other  departments, 
which,  of  course,  resulted  in  confusion,  inefficiency,  and 
waste  of  time.  Under  the  present  plan  the  accounting 
and  auditing  functions  have  been  centralized — the  former 
separated  bureaus  have  been  brought  together  under  one 
control.  Each  step  in  the  process  is  definitely  outlined, 
while  all  fiscal  information  is  kept  on  file  in  one  place  for 
the  common  use  of  all.  It  is,  therefore,  much  easier  to 
know  the  exact  fiscal  standing  at  any  particular  time  and 
to  keep  in  touch  with  exactly  what  is  being  done  with  the 
public  funds. 

Municipal  Budgets. — Another  mark  of  progress  which 
has  been  gaining  prominence  in  municipal  fiscal  adminis- 
tration is  the  use  of  some  form  of  budget  in  calculating 


442  OUTLINES  OF  PUBLIC  FINANCE 

expenditures  and  revenues.  The  general  plan  has  been 
for  the  city  council  to  follow  much  the  same  scheme  as 
has  been  described  in  connection  with  our  national 
finances.  The  increased  use  of  commission  and  city  man- 
ager forms  of  government  made  it  easier,  of  course,  to 
centralize  responsibility.  In  many  cities  the  estimates  of 
revenues  and  expenditures  are  carefully  drawn  up  and  sub- 
mitted, and  the  program  is  definitely  acted  upon.  The 
public  is  given  opportunity  to  know  just  what  the  city 
expects  to  do,  and  can  much  more  easily  guard  its  funds. 
The  accuracy  with  which  the  estimates  are  made  is,  of 
course,  a  factor  which  will  help  determine  the  success  of 
the  budgetary  method. 

Municipal  Indebtedness. — A  question  which  has  con- 
fronted municipal  fiscal  authorities,  particularly  in  recent 
years,  is  the  enormous  growth  in  indebtedness.  The  big 
problem,  of  course,  with  the  ever  increasing  pressure  for 
funds,  is  to  be  able  to  meet  the  indebtedness  when  it  falls 
due.  The  system  which  was  most  in  favor  for  a  number 
of  years  was  the  establishment  of  a  sinking  fund.  Many 
factors  have  combined  to  make  this  method  unsatisfac- 
tory. It  necessitates  the  investment  of  the  funds  which 
are  set  aside,  and  the  addition  of  interest  to  the  fund. 
The  authorities  who  have  been  intrusted  with  the  proper 
investment  of  the  fund  have  often  failed  to  do  all  that  was 
expected.  Funds  have  been  lost  from  poor  investments, 
or  have  been  invested  primarily  for  the  benefit  of  particular 
individuals.  City  authorities  have  failed  to  set  aside  the 
required  amount,  and  have  often  miscalculated  as  to  what 
should  be  set  aside  to  meet  the  debt.  The  result  has  been, 
in  a  large  number  of  cases,  in  spite  of  carefully  planning 
the  sinking  fund,  that  funds  have  not  been  available  to 
meet  the  debt  when  it  matured. 

The  situation  just  described  has  led  many  modern  fiscal 
authorities  to  favor  the  use  of  serial  bonds  instead  of  the 
sinking  fund.  By  this  method  a  part  of  the  bond  issue 
becomes  due  in  successive  years,  and  is  met  from  taxes. 


THE  ADMINISTRATION  OF  PUBLIC  FUNDS      443 

For  instance,  one  tenth  of  a  particular  issue  might  be 
paid  each  year  for  ten  years.  Other  adjustments,  of 
course,  are  possible,  so  that  the  burden  of  principal  and 
interest  would  be  exactly  equal  for  each  year  of  the  loan, 
or  so  that  some  years  would  escape  with  comparatively 
little  or  no  burden.  This  plan  has  the  advantage  of  dis- 
charging the  debt  and  interest  charge  as  funds  are  avail- 
able. It  does  away  with  accumulations  of  funds  and  the 
possibility  of  unwise  investments,  followed  by  a  lack  of 
means  to  meet  the  indebtedness  when  it  is  due.  The 
chance  for  miscalculation  is  minimized,  and  the  tempta- 
tion to  use  public  funds  for  private  gain  is  removed.  As 
a  whole,  the  serial  bond  method  has  proved  more  eco- 
nomical and  satisfactory  than  the  use  of  sinking  funds. 

222.  The  Outlook  for  Proper  Fiscal  Administration  Is 
Encouraging. — With  the  adoption  of  a  Federal  budget 
system  and  the  extension  of  the  plan  among  the  states, 
the  public  will  have  a  better  opportunity,  at  least,  to  know 
what  use  is  being  made  of  its  funds,  and  upon  what  grounds 
charges  of  graft  and  inefficiency  are  made.  The  United 
States  is  no  longer  in  the  stage  of  youth,  as  described  by 
Ambassador  Bryce,  with  a  superabundant  revenue,  so 
that  it  may  commit  fiscal  wrongs  without  feeling  the  evil 
effects.  The  magnitude  of  the  present  indebtedness  with 
its  interest  charge,  together  with  the  immense  reconstruc- 
tion expenses,  is  making  the  public  more  insistent  upon 
proper  fiscal  procedure,  and  demands  the  use  of  every 
device  that  will  make  for  honesty  and  efficiency. 

The  recent  action  of  Congress  and  the  rapid  adoption 
of  scientific  budget  and  administrative  systems  by  the 
states  has  been  gratifying,  and  there  is  no  reason  to  be- 
lieve but  that  the  systems  will  speedily  be  modified  into 
more  efficient  conservators  of  public  funds.  The  neces- 
sity that  has  driven  some  cities  to  seek  better  fiscal  pro- 
cedure with  gratifying  results  will  no  doubt  lead  others 
to  seek  relief  through  the  same  channels.  The  many  or- 
ganizations that  are  exerting  influences  to  secure  better- 


444  OUTLINES  OF  PUBLIC  FINANCE 

ment  will  be  able  to  accomplish  more  after  the  successful 
start  has  been  made,  and  there  is  little  doubt  that  the 
adolescent  stage  in  the  growth  of  our  fiscal  administrative 
policies  has  been  passed. 

ADDITIONAL   READING 

Collins,    The  National  Budget  System  and  American 
Finance. 

Willoughby,  The  Problems  of  a  National  Budget. 
Cleaveland,  Municipal  Administration  and  Accounting. 


CHAPTER  XIX 

FINANCING    AN    EMERGENCY 

223.  Expenditures  for  War  Furnish  the  Best  Example 
of  Emergency  Financiering. — The  question  of  how  to  meet 
emergencies  which  may  overtake  a  nation  or  any  of  its 
minor  political  units  has  always  assumed  an  importance 
of  some  magnitude.  Emergencies  have  frequently  arisen 
when  there  has  been  an  immediate  demand  for  funds  in 
excess  of  those  provided  in  the  regular  budget.  Modern 
fiscal  systems  can  be  much  more  definitely  organized  than 
could  those  of  earlier  generations.  Preparation  can  now 
be  made  beforehand  for  many  events  which  previously 
came  unexpectedly,  and  which  entailed  increased  expendi- 
ture. The  preventive  measures,  also,  which  governmental 
units  have  undertaken,  have  done  much  to  eliminate  un- 
expected and  unprepared-for  events. 

Famine  and  pestilence  formerly  were  common  examples 
of  emergencies  with  which  states  were  compelled  to  cope, 
yet  they  are  seldom  given  a  second  thought  by  the  officials 
of  modern  civilized  countries.  The  regular  expenditure  of 
funds  to  eliminate  the  cause  of  such  occurrences  is  con- 
sidered a  better  method  of  meeting  the  situation.  The 
expense  entailed  in  exterminating  the  mosquito,  for  exam- 
ple, is  considered  preferable  to  an  expenditure  to  cope 
with  an  epidemic  of  yellow  fever.  Likewise  the  expendi- 
tures in  experiment  stations  and  colleges,  where  systems 
of  increased  and  stabilized  production  are  devised  and  dis- 
seminated, are  considered  much  wiser  than  the  attempt  to 
take  care  of  hundreds  and  thousands  of  famine  sufferers. 

While  states  have  done  much  to  eliminate  the  necessity 


446  OUTLINES  OF  PUBLIC  FINANCE 

of  emergency  expenditures,  they  will  never  succeed  in 
making  the  elimination  complete.  Forces  of  nature  are 
still  to  be  reckoned  with,  and  emergencies  which  arise 
therefrom  can  never  be  foreseen  nor  prevented.  Earth- 
quakes and  volcanic  eruptions  will  likely  continue  to 
occur  and  leave  in  their  wake  suffering  and  loss,  the  alle- 
viation of  which  will  often  call  for  the  aid  of  governments. 
Tornadoes,  cyclones,  fires,  and  floods  will  also  continue  to 
occur — with  similar  results,  so  that  officials  can  never  hope 
to  be  entirely  free  from  some  unexpected  expenditures. 

The  importance  of  the  funds  which  have  been  used  and 
are  still  needed  for  the  classes  of  emergencies  just  indi- 
cated, sinks  into  utter  insignificance  when  the  costs  of 
war  are  taken  into  consideration.  Whatever  may  be  the 
future  status  of  war,  nations  in  the  past  have  not  suc- 
ceeded in  eliminating  this  greatest  of  all  emergencies,  but 
have  been  compelled,  continually,  to  face  it  as  a  possi- 
bility if  not  a  probability.  The  attempt  to  make  provi- 
sion through  the  maintenance  of  a  war  chest,  and  its  im- 
practicability, have  been  indicated  in  a  previous  chapter. 
The  enormous  cost  of  modern  warfare,  where  expendi- 
tures of  a  single  day  exceed  the  outlay  of  a  total  conflict 
of  a  century  ago,  with  the  enormous  burden  which  is 
imposed  upon  a  nation's  citizenship,  makes  a  study  of  this 
class  of  expenditure  of  vital  importance.  The  principles 
of  war  finance  present,  in  a  magnified  form,  the  principles 
underlying  all  emergency  financiering.  In  this  chapter, 
then,  consideration  will  be  made  of  some  of  the  underlying 
principles  which  should  be  taken  into  account  in  raising 
funds  to  prosecute  a  war,  as  well  as  the  systems  which 
different  countries  have  employed. 

224.  The  Problem  Is  to  Secure  Revenue  or  Materials. 
— After  the  breakdown  of  the  war  chest  as  a  method  of 
financing  emergencies  such  as  war,  other  methods  of  secur- 
ing funds  had  to  be  found.  Various  schemes  were  hit 
upon,  the  efficacy  and  advisability  of  which  caused  no 
little  discussion  from  fiscal  authorities  and  theorists.  The 


FINANCING  AN  EMERGENCY  447 

demands  of  the  Great  War  renewed  and  intensified  the 
interest  in  this  subject.  The  sums  demanded  by  the  vari- 
ous countries  surpassed  those  contemplated  by  the  wildest 
imaginations,  while  the  estimated  expenditures  for  a  year 
usually  sank  into  insignificance  when  compared  with  the 
sums  which  were  actually  demanded. 

Superficial  Aspect  of  Money. — While  the  demands  for 
revenue  have  been  monetary,  and  the  calculations  have 
been  in  terms  of  money,  in  reality  the  money  represents 
but  a  superficial  aspect  of  the  situation.  During  the 
Revolutionary  War,  when  the  revenue  was  insufficient 
to  meet  the  needs  of  the  government,  requisitions  of  goods 
were  made  upon  the  Colonies.  In  the  end,  the  demand 
of  the  government  is  for  goods — clothing,  munitions,  food 
—and  it  is  with  these  that  the  war  is  actually  fought. 
The  situation  is  much  the  same  as  with  the  money  income 
and  real  income  of  individuals — the  important  item  is 
what  the  money  will  purchase.  When  the  war  is  over  the 
stock  of  money  may  be  intact  or  increased,  while  it  is  the 
goods,  over  which  it  has  given  command,  which  have 
been  used  up.  The  value  of  the  goods  destroyed,  more- 
over, may  vastly  exceed  the  total  stock  of  money  values, 
for  the  same  money  may  be  used  more  than  once  by  a 
government  in  making  purchases.  Funds  secured  from 
taxes,  for  example,  may  be  used  to  purchase  uniforms; 
the  manufacturers  of  uniforms  will  purchase  bonds  and 
the  same  funds  will  be  used  again  by  the  government. 

Burden  upon  Present  Production. — A  large  part  of  the 
goods  must  be  taken  from  present  production,  though  it 
is  possible  that  both  past  and  future  incomes  might  be 
made  to  contribute.  Past  production  could  be  made  to 
pay  by  the  indefensible  scheme  of  taxation  so  severe  that 
it  would  deplete  a  part  of  the  capital  which  had  already 
been  produced.  Future  income  could  be  made  the  basis 
of  payment  by  buying  the  goods  abroad  and  mortgaging 
future  production  to  pay  for  them.  Neither  of  these  plans 
can  be  used  extensively;  consequently  the  burden  falls 


448  OUTLINES  OF  PUBLIC  FINANCE 

upon  present  production.  This  cannot  be  accomplished 
without  some  rearrangements  and,  perhaps,  hardships  in 
industry.  The  slogan,  "  business  as  usual,"  current  in  in- 
dustrial circles  at  the  beginning  of  the  Great  War,  presents 
an  impossible  situation.  The  demands  of  war  are  not  the 
demands  of  peace,  and  industry  does  not  have  time  to  go 
through  a  process  of  evolution  to  meet  the  demands  of 
war,  but  must  adjust  itself  by  revolution.  This  may  be 
done  in  a  number  of  ways.  Capital  and  labor,  which  have 
been  producing  goods  nonessential  to  the  conduct  of  the 
war,  may  be  put  to  producing  necessary  materials. 
Machinery  which  has  been  idle  one  third  of  the  day  may 
be  run  the  full  day.  The  public  may  substitute  cheaper 
products  for  more  costly  goods,  and  save  hi  productive 
energy.  All  these  changes  necessitated  by  the  sudden 
demands  will  bring  about  some  deviation  from  former 
business  procedure. 

In  securing  funds,  then,  the  fiscal  authorities  should 
keep  continually  in  mind  not  only  the  securing  of  revenue, 
but  what  effect  the  method  of  securing  it  will  have  in  the 
ultimate  source  of  all  revenue — the  wealth  of  the  citizen- 
ship. The  maintenance  of  the  patrimony  of  the  state  is 
an  important  consideration,  and  this  patrimony  should 
be  impaired  just  as  little  as  possible.  In  the  securing  of 
the  funds,  such  questions  as  the  probable  incidence,  the 
equalization  of  burden,  the  return,  and  the  effect  on  future 
generations  should  not  be  overlooked.  The  means  for 
securing  revenue  lies  in  the  power  of  the  state  to  tax,  to 
borrow,  and  to  issue  fiat  money.  Any  combination  of 
these  three  possible  methods  might  also  be  used.  The 
insufficiency  of  the  use  of  fiat  money  to  any  extent  has 
often  been  demonstrated,  consequently  most  of  the  pres- 
ent discussion  as  to  means  of  raising  revenue  is  concerned 
with  the  relative  merits  of  taxation  and  borrowing  as 
methods  of  supplying  the  government  with  funds. 

225.  Borrowing  Possesses  Some  Evident  Advantages. — 
Opinions  vary  greatly  as  to  the  proper  method  of  war 


FINANCING  AN  EMERGENCY  449 

finance.  Some  contend  that  the  entire  burden  should  be 
met  from  taxes,  while  others  go  to  the  opposite  extreme 
and  conclude  that  the  proper  method  to  pursue  is  to  rely 
entirely  upon  borrowing  to  secure  the  necessary  funds. 
Many  others  would  adopt  some  combination  of  the  two 
processes  as  the  most  logical  course  of  procedure.  It  will 
be  profitable  to  review  some  of  the  advantages  and 
disadvantages  arising  with  the  use  of  each  method, 
which  should  be  kept  in  mind  in  formulating  a  fiscal 
system. 

Produces  Revenue  Quickly. — The  demands  made  by  war 
upon  the  Treasury  will  likely  be  greater  than  the  ordinary 
sources  of  revenue  can  provide  unless  the  entrance  into 
it  has  been  premeditated  and  proper  provision  has  been 
made  for  the  needed  funds.  Recourse  must  be  had  to 
some  plan  that  will  provide  funds  quickly,  and  borrowing 
is  adapted  to  meet  this  need.  This  is  true  because,  in 
making  a  loan,  the  individual  does  not  feel  the  sense  of 
sacrifice  which  is  involved  in  the  payment  of  taxes.  Loans 
to  the  government  are  looked  upon  as  investments — an 
annual  return  is  paid  in  the  form  of  interest,  while  the 
principal  is  also  payable  in  the  future.  In  the  mind  of  the 
individual,  the  bond  which  he  has  purchased  simply  rep- 
resents his  property  in  another  form.  Taxation,  on  the 
other  hand,  even  if  adequate  machinery  were  hi  existence 
to  secure  results,  would  be  felt  by  the  individual  as  a 
burden  from  which  no  remuneration  would  be  received. 

Borrowing  likewise  possesses  the  advantage  of  quickly 
mobilizing  idle  capital  and  putting  it  to  work  in  the  prose- 
cution of  the  war.  At  any  time  there  is  more  or  less  idle 
capital  seeking  investment,  but  because  of  the  uncertain- 
ties which  exist  at  the  time  of  a  declaration  of  war,  the 
amount  is  likely  to  be  larger  than  usual.  The  government 
can  secure  this  idle  capital  by  a  proper  appeal  to  the  in- 
vestment it  offers,  supplemented,  perhaps,  by  the  appeal 
to  patriotism,  and  can  much  more  quickly  put  it  to  serv- 
ing the  needs  of  war  than  through  the  use  of  any  other 


450  OUTLINES  OF  PUBLIC  FINANCE 

policy.  The  more  idle  capital  which  can  be  secured,  the 
less  will  be  the  necessary  demands  upon  existing  industry, 
and  to  that  extent  the  derangement  of  business  caused 
by  the  war  will  not  be  so  keenly  felt. 

226.  Borrowing  Is  Likely  to  Increase  the  Costs  of  War. 
— The  outstanding  objection  to  the  use  of  fiat  money  as  a 
means  for  meeting  an  emergency  is  that  the  inflation  of 
the  currency  causes  a  higher  price  level,  which  not  only 
enhances  the  cost  of  the  war — since  the  government  must 
buy  at  the  new  level — but  places  a  burden  upon  all  who 
purchase  goods.  It  is  possible  that  borrowing  will  cause 
an  inflation  of  purchasing  power,  and  consequently  an 
increase  in  prices,  but  just  to  what  extent  it  is  difficult  to 
determine.  Under  the  modern  system  of  exchange  a  vast 
amount  of  purchases  is  made  with  credit,  and  to  the  ex- 
tent that  borrowing  manufactures  credit  instruments 
which  can  be  used  directly  or  indirectly  as  purchasing 
power,  a  rise  in  prices  will  result.  In  so  far  as  bonds  are 
purchased  with  funds  which  would  otherwise  enter  the 
market  and  command  goods,  this  effect  is  not  felt.  The 
government  has  simply  substituted  itself  as  purchaser  for 
the  individual  from  whom  the  funds  were  secured. 

Causes  Expansion  of  Credit. — The  expansion  of  credit 
from  borrowing  is  likely  to  come  through  the  institution 
of  the  modern  bank.  Individuals,  spurred  on  by  patriotic 
zeal,  may  secure  credit  accommodation  which  would  not 
otherwise  be  considered,  and  turn  this  over  to  the  govern- 
ment in  exchange  for  bonds.  The  banks  themselves  have 
been  relied  upon  extensively  as  aids  to  the  government. 
The  percentage  of  reserve  has  been  decreased,  frequently, 
in  order  to  extend  credit  to  the  government.  The  govern- 
ment, hi  order  to  help  the  banks  lend  assistance  to  itself, 
has  made  deposits  of  specie  on  the  implied  condition  that 
aid  would  be  given.  With  this  specie  as  a  basis,  several 
times  as  much  credit  could  be  extended  in  the  purchase 
of  bonds  or  certificates  of  indebtedness.  The  use  of  the 
obligations  of  the  government,  moreover,  as  the  basis  for 


FINANCING  AN  EMERGENCY  451 

the  issue  of  bank  notes,  forms  another  means  for  the  in- 
crease in  purchasing  media.  The  issue  of  the  Federal 
Reserve  Bank  notes,  based  upon  certificates  of  indebted- 
ness, forms  a  good  example  of  this  form  of  transaction.1 

From  the  nature  of  the  case  it  is  impossible  to  calculate 
just  how  much  purchasing  power  exists  because  of  the 
issue  of  evidences  of  indebtedness,  which  would  not  other- 
wise be  found.  Even  if  this  could  be  accurately  deter- 
mined, to  calculate  the  precise  effects  on  prices  would 
still  be  more  or  less  of  a  conjecture  because  of  the  derange- 
ment in  the  production  of  commodities  caused  by  the  war. 
The  fact  remains,  however,  that  it  is  quite  likely  that 
government  borrowing  will  cause  a  perceptible  expansion 
of  purchasing  power,  and  with  it  a  consequent  increase  in 
the  general  price  level. 

Effects  of  Increased  Price. — To  the  extent  that  borrow- 
ing increases  prices,  the  effect  is  much  the  same  as  the 
issue  of  fiat  money.  The  burden  is  increased  to  the  gov- 
ernment and,  ha  varying  degrees,  to  the  citizenship.  The 
materials  for  war  are,  to  a  large  extent,  purchased  in  the 
open  market,  and  the  inflated  prices  must,  of  course,  be 
paid.  While  this  burden  may  not  be  insignificant,  it  does 
not  compare  to  that  felt  by  the  citizens,  since  they  too 
must  buy  at  the  higher  price  level.  Wages  do  not  rise  as 
rapidly  as  prices,  thereby  entailing  a  burden  upon  the 
laboring  classes  which  often  brings  about  a  derangement 
of  industry  because  of  the  increased  prevalence  of  strikes. 
Individuals  and  institutions  whose  income  is  fixed,  en- 
counter the  most  severe  difficulties.  Industries  such  as 
public  utilities  fall  in  this  class.  The  rates  for  their 
services  are  fixed,  while  expenses  mount  with  the  price 
changes. 

Some  industries,  on  the  other  hand,  reap  benefits  from 
the  situation.  Manufacturers  who  are  paying  wages  and 
buying  raw  materials  at  one  price  level,  and  selling  finished 

1  See  p.  499  for  statistics  showing  the  increase  in  purchasing  media  during 
the  Great  War. 


452  OUTLINES  OF  PUBLIC  FINANCE 

products  at  a  higher  price  level  at  a  later  period,  find  a 
larger  differential  to  go  to  the  profit  account.  Enterprisers 
in  the  extractive  industries,  such  as  farming,  mining,  and 
lumbering,  usually  find  that  increased  expenses  do  not 
absorb  the  increased  returns.  The  interest  secured  from 
the  increased  expansion  of  bank  credit  tends  to  make  the 
situation  a  profitable  one  for  banking  institutions.  The 
net  result  of  borrowing,  then,  in  so  far  as  it  increases 
prices,  is  to  saddle  a  burden  upon  the  citizenship  by  neces- 
sitating greater  government  expenditure,  and  by  causing 
a  greater  expenditure  by  individuals  to  secure  the  same 
commodities. 

The  interest  charge,  moreover,  is  no  small  item  in  the 
total  cost  when  the  length  of  time  which  government 
securities  usually  run  is  taken  into  consideration.  Sup- 
pose, for  instance,  that  a  war  were  entirely  financed  by  the 
issue  of  twenty-five-year  4  per  cent  bonds.  The  cost  in 
this  case  would  be  doubled,  since  the  interest  charge 
would  amount  to  as  much  as  the  principal.  Even  if  there 
were  no  effect  on  prices,  the  interest  charge  which  results 
from  borrowing  necessarily  makes  a  war  more  costly. 

227.  Borrowing  Does  Not  Shift  the  Burden  of  War  to 
the  Future. — One  of  the  most  popular  of  the  arguments 
which  have  been  used  to  justify  extensive  borrowing  to 
finance  a  war  is  that  future  generations  are  recipients  of 
the  benefits,  and  hence  should  share  the  burdens.  It  is 
believed  they  share  the  burden  by  paying  off  the  bonds 
which  are  issued  during  the  progress  of  the  war.  There 
is  no  question  but  that  war  entails  a  burden  upon  the 
future — the  sinking  of  battleships  and  merchant  marine, 
the  destruction  of  factories,  cities,  mines,  railroads,  and 
agricultural  lands,  which  otherwise  would  have  been 
handed  down  to  posterity,  is  conclusive  evidence  that  war 
places  a  burden  upon  the  future.  The  contention,  how- 
ever, that  the  burden  may  be  shifted  has,  in  reality,  no 
foundation.  In  only  one  way  can  this  be  possible.  If 
the  nation  which  borrows  secures  its  loans  from  a  foreign 


FINANCING  AN  EMERGENCY  453 

country,  and  in  turn  purchases  abroad  the  products  with 
which  to  prosecute  the  war,  it  may  continue  to  live 
as  usual  and  the  burden  will  fall  when  the  bonds  are 
payable. 

Burden  Felt  During  War. — The  usual  situation  is  for 
loans  to  be  made  at  home,  and  the  revenue  thus  secured 
to  be  spent  within  the  country.  In  this  case  the  burden, 
as  far  as  the  national  aspects  are  concerned,  cannot  be 
shifted.  A  war  is  waged  by  using  up  large  numbers  of 
men  and  vast  quantities  of  goods;  consequently  men 
who  will  reach  maturity,  and  goods  which  will  be  pro- 
duced twenty  or  thirty  years  hence,  cannot  be  used  to 
fight  present  battles.  An  individual  who  has  one  thou- 
sand dollars  has  a  command  over  commodities,  but  just 
as  soon  as  he  turns  this  over  to  the  government  in  exchange 
for  a  bond  he  gives  up  this  command.  It  is  impossible 
to  eat  one's  cake  and  have  it  too — one  cannot  spend  his 
money  for  goods  and  at  the  same  time  turn  it  over  to  the 
government  to  purchase  war  materials. 

Borrowing,  then,  does  not  lessen  present  material  sac- 
rifices, for  just  as  much  private  consumption  must  be 
forgone,  just  as  many  commodities  are  destroyed,  as  if 
the  war  were  financed  by  gifts  or  taxes.  The  difference 
to  future  generations  is  that,  in  the  case  of  borrowing, 
bonds  are  handed  down  to  them  which  they  must  be  taxed 
to  pay,  while  if  no  bonds  had  been  issued  they  would  be 
saved  the  expense  of  going  through  the  process  of  taxing 
themselves  to  pay  for  their  bonds. 

The  above  reasoning  applies  where  the  same  class  which 
purchases  the  bonds  is  to  be  taxed  to  redeem  them.  Take 
a  simple  illustration.  If  there  were  no  discounting  of  the 
future,  in  what  light  would  an  individual  consider  the 
purchase  of  a  ten-year  5  per  cent  bond  if  the  interest  and 
principal  were  to  be  met  by  the  bondholder?  He  is  simply 
compelled  to  save  enough  each  year  to  pay  the  interest 
to  himself,  and  at  the  end  of  the  ten  years  must  have 
saved  enough  to  pay  him  his  principal.  If  the  conditions 


454  OUTLINES  OF  PUBLIC  FINANCE 

of  this  assumption  were  true,  and  realized,  very  little 
popularity  would  be  attached  to  the  purchase  of  bonds. 

Shifting  Burden  of  Payment. — The  future  is  discounted 
to  such  an  extent  that  the  sale  of  bonds  might  still  be 
popular  even  if  it  were  realized  that  there  could  be  no 
shifting  of  the  burden  of  payment.  There  exists,  how- 
ever, the  possibility  of  shifting  the  burden  of  payment  to 
different  individuals  or  to  a  different  class  of  society  from 
the  purchaser  of  the  bonds.  As  already  indicated,  bonds 
must  eventually  be  paid  from  some  form  of  taxes.  If,  in 
the  coming  generation,  the  plumber  class  can  be  taxed 
to  pay  the  interest  and  principal  of  the  bonds  which  the 
carpenter  class  owns,  then  there  is  a  shifting  of  the  burden 
from  one  class  of  society  to  another.  The  plumbers  are 
made  to  recoup  the  carpenters  for  the  burden  they  have 
shouldered.  The  bond  which  the  carpenter 's  son  inherited 
from  his  father  represents  that  much  claim  upon  the  pro- 
ductivity of  the  sons  of  plumbers. 

Shifting  of  this  nature  represents  a  situation,  moreover, 
which  is  very  likely  to  occur.  When  the  war  is  on  and  the 
feeling  of  patriotism  is  high,  a  call  for  loans  meets  with  a 
generous  response  from  the  wealthy  class.  This  is  as  it 
should  be,  because  of  the  evident  ability  to  carry  burdens. 
When  taxes  are  levied  to  pay  the  interest  and  principal, 
however,  they  are  not  likely  to  fall  upon  the  wealthy  class 
in  nearly  the  same  proportion  that  it  has  subscribed  to 
loans.  Customs  duties  and  excise  taxes  have  been  exten- 
sively used,  and  because  of  the  influence  of  the  wealthier 
classes  in  legislative  bodies,  the  fiscal  system  may  be  so 
framed  that  an  undue  part  of  the  taxes  will  fall  upon  the 
poorer  classes.  To  the  extent  that  this  is  true,  borrowing 
causes  the  burden  of  war  to  be  regressive. 

228.  The  Extensive  Use  of  Taxes  Has  Much  to  Com- 
mend It. — Opposed  to  those  who  advocate  the  extensive 
use  of  loans  for  financing  a  war  are  the  advocates  of  the 
extensive  use  of  taxation.  Since  the  burden  must  be  met 
from  taxes  eventually,  whatever  the  method  adopted  at 


FINANCING  AN  EMERGENCY  455 

the  time,  the  extensive  use  of  taxes  from  the  beginning  is 
considered  to  have  many  advantages.  Since  loans,  in  a 
material  sense,  do  not  decrease  the  burden  which  falls 
upon  a  people  engaged  in  conducting  a  war,  the  taking  of 
the  necessary  amount  by  taxation  would  not  cause  a 
greater  burden  than  borrowing.  One  significant  result  of 
postponing  taxes  by  borrowing  is  to  make  them  much 
heavier  in  the  end. 

Taxation  and  Prices. — The  extensive  use  of  taxes,  on 
the  other  hand,  will  be  conducive  of  much  good.  The  bur- 
den to  the  government  and  its  citizens  will  be  materially 
lessened.  The  probability  of  inflation  which  comes  from 
loans  is  lessened,  consequently  the  resulting  rise  in  price 
does  not  occur,  and  neither  the  government  nor  individ- 
uals must  pay  increased  prices  for  the  products  which 
they  demand.  It  may  be  possible  to  use  the  tax  system 
also  as  a  means  for  stabilizing  prices.  Before  the  advent 
of  war,  individuals  have  been  accustomed  to  spend  their 
incomes  for  certain  classes  of  goods.  After  the  advent  of 
the  war  they  cannot  buy  as  many  goods  because  produc- 
tion has  been  deranged  to  supply  the  materials  necessary 
for  the  prosecution  of  the  war.  The  result  is  likely  to  be 
an  increase  in  price  for  the  materials  which  are  available 
for  individual  consumption.  If,  however,  taxation  were 
increased  in  proportion  as  the  available  goods  were  de- 
creased, then  prices  would  tend  to  remain  the  same  and 
no  burden  would  be  felt.  The  individual  gets  just  as 
many  goods,  the  only  difference  being  that  he  does  not 
have  to  turn  over  more  money  to  get  them. 

Drastic  taxation  at  the  beginning  of  a  war  may  accom- 
plish other  benefits  for  its  prosecution  than  the  supplying 
of  revenue.  One  of  the  necessary  adjustments,  and  one 
which  must  be  made  quickly,  is  the  transfer  of  men  and 
women  workers  from  nonessential  industries  to  the  pro- 
duction of  war  materials.  A  taxation  so  severe  that  little 
would  be  available  to  be  spent  for  nonessentials,  would 
cause  the  production  of  such  commodities  to  cease,  and 


456  OUTLINES  OF  PUBLIC  FINANCE 

their  producers  to  seek  places  where  there  is  a  demand  for 
their  services.  This  would  not  only  supply  the  needed 
workers,  but  would  take  them  from  those  industries  from 
which  they  can  best  be  spared. 

Exaggerated  Objections. — Some  objections  to  the  exten- 
sive use  of  taxes  are  frequently  exaggerated.  Much  is  still 
made,  in  some  quarters,  over  the  fact  that  borrowing  is 
the  time-honored  method  of  financing  a  war.  But  with 
the  successive  breaking  of  historic  precedence  during  the 
Great  War,  this  statement  bears  no  weight,  unless  reasons 
be  advanced  for  continuing  the  policy.  The  objection 
that  taxation  will  have  a  deterrent  effect  upon  industry, 
at  a  time  when  it  needs  all  possible  encouragement,  is  more 
searching.  As  to  this  situation,  however,  much  will  de- 
pend upon  the  kind  of  the  tax,  the  height  of  patriotic 
zeal,  the  possibilities  of  evasion,  and  similar  considera- 
tions. War  is  a  period  of  prosperity  for  the  industries 
which  survive,  and  they  are,  to  an  increased  extent,  able 
to  meet  the  burden.  Large  returns  are  received  from  war 
contracts,  prices  are  rising,  and  profits  are  swelling,  while 
the  derangement  of  industry  causes  hesitation  in  the  in- 
vestment of  the  newly  created  capital.  A  tax  which  is 
wisely  imposed  may  take  a  large  part  of  this  war-created 
wealth  without  causing  any  check  upon  the  exertions  of 
labor  or  capital.  Taxes  may,  indeed,  often  be  a  spur  to 
greater  effort,  so  as  to  secure  a  larger  differential  margin 
after  the  tax  is  paid. 

Individual  Attitude. — If  patriotism  is  running  high, 
there  is  scarcely  a  limit  to  the  tax  burdens  which  individ- 
uals and  industry  will  willingly  bear.  If  the  motivating 
force  hi  production  is  patriotism  rather  than  private  gain, 
there  need  be  no  fear  of  seriously  handicapping  produc- 
tive enterprise  by  heavy  taxes.  After  the  war,  however, 
this  patriotic  motive  will  have  passed,  and  it  may  be 
much  more  difficult  to  put  into  effect  a  satisfactory 
scheme  of  taxes.  Those  who  are  most  able  to  bear  the 
burden  will  be  much  more  concerned  about  shifting  it  to 


FINANCING  AN  EMERGENCY  457 

other  shoulders.  To  be  successful  during  a  war,  a  tax 
system  should  be  accompanied  by  an  efficient  adminis- 
trative machine,  so  that  justice  can  be  secured  in  reaching 
all  the  sources  which  should  contribute.  Not  only  should 
all  the  sources  be  reached,  but  evasion  of  the  tax  should 
be  made  difficult,  and  it  should  be  made  difficult  for  the 
burden  to  be  shifted  to  others  than  those  who  should  bear 
it.  To  accomplish  this  in  its  entirety,  of  course,  is  impos- 
sible, but  the  more  nearly  the  ideal  is  approximated,  the 
more  just  and  successful  will  be  the  use  of  taxes. 

Equalization  of  Burden. — The  extensive  use  of  taxes 
tends  to  equalize  the  burden  of  a  war  upon  the  different 
classes  of  citizens  to  a  much  greater  extent  than  the  use 
of  extensive  borrowing.  Not  only  is  this  true  of  the  civil- 
ian classes,  but  the  burden  is  more  equally  divided  be- 
tween the  soldier  and  the  civilian.  Suppose,  for  instance, 
two  citizens,  at  the  beginning  of  a  war,  each  of  whom  is 
receiving  a  salary  of  $10,000.  One  goes  to  the  front  and 
gives  up  his  salary;  the  other  remains  at  work  and  buys 
bonds  with  all  above  mere  living  expenses.  As  far  as 
monetary  sacrifice  is  concerned,  each  is  giving  up  the  same 
amount.  The  situation  changes,  however,  after  the  war. 
The  returned  soldier  enters  his  old  position,  and  both  are 
taxed  to  pay  for  the  bonds  held  by  the  one  who  remained 
at  his  job.  To  have  equalized  the  burden,  the  amount 
taken  from  the  civilian  should  have  been  in  the  form  of 
taxes  rather  than  loans. 

Consideration  of  Expediency. — Much  care  must  be  used 
in  formulating  a  tax  system  which  will  meet  both  the  re- 
quirements of  justice  and  expediency.  That  system  will 
most  nearly  approximate  justice  which  imposes  an  equal 
burden  upon  all  classes.  To  go  the  limit  which  justice 
might  sanction,  however,  might  not  be  expedient.  A 
government,  for  example,  might  be  justified  in  taking  all 
the  returns  of  industry  which  have  arisen  from  war  ac- 
tivities, or  even  all  returns  which  are  not  specifically 
needed  for  reinvestment  in  essentially  war  activities.  The 


458  OUTLINES  OF  PUBLIC  FINANCE 

effect  of  such  a  policy  on  economic  activity  might  be  dis- 
astrous, and  so  expediency  suggests  an  approximation  of 
justice  through  the  use  of  steeply  progressive  tax  rates. 
A  more  extensive  use  can  be  made  of  taxes  upon  business, 
with  less  burden,  than  upon  other  bases,  because  there  is 
less  risk  in  business  undertakings.  A  larger  percentage  of 
necessities  is  being  produced  for  which  the  market  is  more 
assured,  than  for  other  classes  of  goods.  Expediency 
would  sanction,  also,  the  use  of  taxes  upon  commodities, 
but  because  of  their  regressive  nature  their  use  should  be 
tempered  by  the  requirements  of  justice. 

229.  Borrowing  Usually  Has  a  Legitimate  Place  in 
Emergency  Financiering. — The  case  for  the  extensive  use  of 
taxes  in  financing  a  war  is  strong,  yet  various  circumstances 
usually  exist  which  make  it  impracticable  to  attempt 
to  raise  all  the  needed  revenues  from  this  source.  The 
important  thing  to  be  kept  continually  before  the  minds 
of  the  fiscal  authorities  is  that  a  policy  must  be  adopted 
which  will  see  the  war  through.  The  source  of  the  revenue 
must  not  be  used  up,  so  that  the  treasury  will  find  no 
more  funds  available  when  the  conflict  is  only  partially 
finished,  but  the  source  must  be  kept  intact  so  that  each 
successive  demand  will  be  met  with  a  forthcoming  supply. 
The  tree  must  not  be  cut  down  to  get  the  fruit,  but  must 
be  left  to  produce  more  fruit  as  it  is  needed  to  supply  the 
recurring  wants. 

Administrative  Machinery. — The  revenue  system  which 
is  in  existence  at  the  outbreak  of  a  war  is  a  consideration 
of  first  magnitude  when  proposals  are  made  to  increase 
many  fold  the  amount  secured  from  taxes.  If  the  policy 
of  taxation  is  contemplated,  it  is  most  certainly  true  that 
preparation  for  war  should  be  made  in  tune  of  peace.  In 
order  to  meet  the  excess  demands,  the  revenue  system 
must  be  one  which  is  capable  of  rapid  expansion.  This 
can  be  done  only  when  the  revenue  system  of  peace  times 
is  broad  in  its  scope;  and  if  its  rates  are  less  than  the  maxi- 
mum revenue  rates.  If  this  be  true,  all  that  needs 


FINANCING  AN  EMERGENCY  459 

to  be  done  when  the  crisis  comes  is  to  increase 
the  rates  up  to  the  maximum  revenue  yield,  if  neces- 
sary. If,  however,  the  maximum  revenue  is  already 
being  received,  the  officials  are  confronted  with  the  task 
of  devising  new  taxes  and  new  administrative  machinery, 
both  of  which  are  tune-consuming  propositions.  New 
taxes,  moreover,  are  generally  unpopular,  and  a  period 
of  education  is  necessary  before  people  will  pay  them 
willingly.  The  needs  of  the  government  will  not  wait, 
and  while  an  adequate  tax  system  is  being  arranged  it 
may  be  necessary  to  resort  to  borrowing. 

Importance  of  Personal  Element. — Human  nature  is  an 
important  factor  with  which  fiscal  authorities  must  always 
reckon.  It  has  already  been  indicated  that  individuals 
discount  the  future.  The  fact  that  taxes  must  at  some 
time  be  levied  to  the  full  amount  of  all  loans  does  not 
weigh  heavily  enough  upon  the  present  generations  to 
induce  them  to  shoulder  the  entire  burden  in  taxes  at 
present,  in  order  to  avoid  the  future  tax  payments.  While 
the  material  sacrifice  may  be  just  as  great  in  lending  an 
amount  as  if  it  had  been  taken  in  taxes,  the  personal  loss 
is  much  less  in  the  case  of  the  loan.  To  the  individual 
the  bond  merely  represents  his  property  in  another  form. 
The  use  of  borrowing,  therefore,  will  generally  result  in 
a  much  heartier  response,  and  will  secure  more  adequate 
returns  when  funds  are  needed  quickly,  because  it  appeals 
to  human  nature. 

Confidence  in  Government. — The  confidence  which  the 
citizenship  has  in  its  government,  and  the  strength  of  the 
sentiment  in  favor  of  the  undertaldng,  will  be  somewhat 
of  a  guide  to  the  authorities  in  determining  the  sources  of 
revenue.  If  the  cause  is  close  to  the  hearts  of  the  people, 
and  the  patriotic  zeal  at  a  high  pitch,  greater  personal 
sacrifices  will  be  willingly  borne,  and  consequently  taxes 
can  be  used  more  extensively  than  if  the  interest  were 
merely  lukewarm.  As  long  as  the  administration  of  the 
government  has  been  conducted  in  such  a  way  as  to 


460  OUTLINES  OF  PUBLIC  FINANCE 

strengthen  the  confidence  of  the  people,  great  sacrifices 
will  be  made  to  support  it  in  its  undertakings.  An  ad- 
ministration which  possesses  the  absolute  confidence  of 
its  citizenship,  and  which  embarks  upon  a  cause  which 
meets  with  their  undivided  approval,  can  rely  extensively 
upon  taxes  to  secure  the  needed  revenue. 

Industrial  Considerations. — The  effect  of  the  fiscal  policy 
on  the  productive  capacity  of  the  country  must  always  be 
kept  in  the  foreground.  The  appeals  must  be  made  in 
such  a  way  that  each  will  bring  results  in  the  form  of 
revenue,  and  yet  always  act  as  a  spur  to  increased  energy 
in  production,  and  never  as  a  discouragement.  This  is 
particularly  true  in  the  first  stages  of  the  conflict,  when 
industry  is  burdened  with  discouragements.  Some  have 
endured  a  hard  transition  from  unessential  lines  of  en- 
deavor to  the  production  of  war  materials.  Industry, 
moreover,  has  likely  been  hard  hit  by  the  withdrawal  of 
labor  to  the  army.  The  precipitation  of  any  unexpected  and 
unprepared-f  or  heavy  tax  burden  upon  industry  under  such 
conditions  could  scarcely  help  having  a  deterrent  effect. 
In  order  to  keep  up  the  productive  capacity  under  these 
circumstances,  a  resort  to  borrowing  may  be  preferable. 

The  general  economic  and  industrial  condition  of  the 
country,  as  compared  with  the  magnitude  of  the  demands, 
is  a  factor  to  be  kept  in  mind.  It  would  be  suicidal  to 
attempt  to  collect  in  taxes  an  amount  greater  than  the 
national  income.  It  may  be  true,  however,  that  the 
necessary  revenue  will  exceed  this  sum.  In  the  case  of  a 
life  and  death  struggle  it  may  become  necessary  to  spend 
many  tunes  as  much  as  the  national  income.  In  such 
cases  borrowing  must  be  resorted  to,  from  a  foreign  coun- 
try, if  possible,  and  the  loan  be  repaid  gradually  from  the 
income  of  succeeding  years. 

230.  The  Proper  Combination  of  Loans  and  Taxes 
Forms  the  Best  War  Finance  Policy. — The  foregoing  dis- 
cussion points  to  the  conclusion  that,  while  an  extensive 
pr  exclusive  reliance  upon  taxes  is  theoretically  advisable, 


FINANCING  AN  EMERGENCY  461 

yet  the  practical  aspects  of  the  case  nearly  always  make 
some  use  of  loans  desirable.  The  problem  of  the  revenue 
administrators  is  to  hit  upon  the  proper  combination  in 
the  use  of  these  two  sources.  It  will  usually  happen  that 
greater  reliance  must  be  placed  upon  loans  at  the  begin- 
ning of  the  emergency.  Revenue  systems  are  not  usually 
in  operation  which  will  permit  of  sufficient  expansion  to 
meet  the  immediate  demands.  Public  sentiment,  likewise, 
may  have  to  be  developed  before  individuals  are  willing 
to  endure  the  feeling  of  sacrifice.  At  the  beginning,  then, 
the  extensive  use  of  the  borrowing  power  may  be  the 
proper  solution.  This  does  not  mean  that  it  should  be  the 
permanent  policy.  The  authorities  should  at  once  begin 
to  develop  new  taxes  and  to  expand  the  old  where  it  is 
possible.  As  time  goes  on,  the  habit  of  paying  more  taxes 
will  be  formed,  and  little  opposition  will  be  encountered. 
As  public  sentiment  becomes  more  favorable,  taxation 
can  be  pushed  more  rapidly,  until  it  may  be  made  the 
chief  source  of  revenue. 

If  any  policy  for  the  proper  procedure  of  officials  were 
to  be  formulated  it  would  be  something  like  this:  use 
taxes  at  the  beginning  as  much  as  possible,  but  not  to 
such  an  extent  as  to  antagonize  individuals  or  discourage 
industry;  introduce  taxes  as  rapidly  as  possible,  so  that 
as  time  goes  on  the  majority,  if  not  all,  of  the  needed 
revenue  shall  come  from  this  source.  In  the  light  of  the 
underlying  principles  which  have  been  discussed  in  the 
preceding  pages,  it  will  be  instructive  to  review  some  of 
the  methods  which  have  been  used  in  financing  wars,  to 
see  how  closely  they  have  adhered  to  these  principles, 
and  to  note  the  degree  of  success  which  was  attained. 

231.  Earlier  Wars  of  the  United  States  Were  Financed 
Largely  Through  Borrowing. — Between  the  Revolutionary 
War  and  the  Great  War,  only  two  conflicts  have  appeared 
in  American  history  which  have  placed  any  real  burden 
upon  the  people.  These  were  the  War  of  1812  and  the 
Civil  War.  The  fiscal  measures  of  the  Revolution  do  not 


1<i2  OUTLINES  OF  PUBLIC  FINANCE 

represent  a  predetermined  and  definite  plan,  but  are  ex- 
amples of  a  government  of  little  power  attempting  to 
secure  funds  in  any  possible  manner.  The  issue  of  paper 
money  was  extensively  relied  upon  at  the  beginning  of 
the  struggle,  but  its  rapid  depreciation  proved  the  in- 
effectiveness of  this  plan.  Many  attempts  were  made  to 
requisition  both  money  and  materials  from  the  states, 
while  borrowing,  both  at  home  and  abroad,  was  pressed 
to  the  limit.  Attempts  to  establish  a  national  system  of 
taxation  proved  unsuccessful,  and  resort  was  finally  made 
to  the  establishment  of  a  bank  to  extend  aid  to  the  gov- 
ernment. In  the  War  of  1812  and  the  Civil  War,  however, 
an  attempt  was  made  to  adhere  to  a  more  definite  policy. 

The  War  of  1 812.— Secretary  of  the  Treasury  Gallatin 
was  responsible  for  the  plan  used  to  finance  the  War  of 
1812.  Congress  heartily  consented  to  the  plan  which  he 
proposed,  while  only  an  occasional  individual  member 
voiced  an  objection.  Reliance  was  to  be  placed  entirely 
upon  borrowing  to  meet  the  increase  of  expenditure  be- 
cause of  the  war,  and  an  earnest  attempt  was  made  to 
adhere  to  this  policy.  The  Secretary  advised  that  taxes 
be  increased  sufficiently  to  meet  the  interest  upon  the 
loans,  but  Congress  was  unwilling  to  digress  from  the 
policy  of  borrowing  even  to  this  extent. 

The  flotation  of  the  first  loan  was  not  accompanied  by 
any  marked  degree  of  success.  This  was  attributed  to 
the  fact  that  the  provisions  of  the  bonds  were  not  attrac- 
tive enough.  The  response  to  successive  issues,  however, 
was  even  worse,  and  the  depreciation  on  the  market  con- 
tinued to  increase,  until  in  1814  the  government  had 
practically  reached  its  limit  in  the  expansion  of  long-time 
credit.  The  failure  of  the  loans  to  produce  the  desired 
amount  led  to  the  frequent  and  extensive  use  of  treasury 
certificates.  The  policy  clearly  demonstrated  the  fact 
that  borrowing  cannot  be  conducted  successfully  unless 
some  inclination  is  shown  to  provide  a  means  for  the 
redemption  of  promises.  When  Mr.  Dallas  took  up  the 


FINANCING  AN  EMERGENCY  463 

Treasury  portfolio  in  1814  he  condemned  in  no  uncertain 
language  the  policy  which  had  been  so  closely  followed. 
He  attributed  the  breakdown  of  the  credit  machinery  to 
the  failure  to  use  adequate  taxation  to  form  a  basis  for 
credit  expansion.  His  foremost  proposal,  in  an  effort  to 
retrieve  the  mistakes  of  his  predecessors,  was  to  put  into 
force  an  adequate  system  of  taxes. 

The  Civil  War. — The  system  adopted  to  finance  the 
Civil  War  was  practically  a  repetition  of  that  of  the  War 
of  1812.  The  same  general  plan  was  followed  with  the 
same  general  results.  Almost  exclusive  reliance  was 
placed  upon  borrowing,  followed  by  a  collapse  of  the  credit 
system.  The  real  difference  was  the  step  in  advance  of 
thr  earlier  policy  when  the  treasury  notes,  or  greenbacks, 
were  given  legal  tender  qualities  to  settle  individual  debts. 
No  comment  is  needed,  to  those  who  are  familiar  with  our 
economic  history,  upon  their  rapid  depreciation  and  con- 
sequent economic  effects.  Secretary  Chase,  in  his  recom- 
mendations to  Congress,  advised  taxes  of  sufficient  amount 
to  take  care  of  ordinary  expenses  of  interest  on  the  debt 
obligations,  and  of  a  start  toward  a  sinking  fund.  Some 
new  taxes  were  proposed,  but  these  were  intended  to 
make  up  the  deficit  in  the  revenue  caused  by  the  war. 
The  most  important  of  these  was  the  inauguration  of 
income  taxes  and  internal  revenue  duties.  The  war  had 
progressed  nearly  three  years  before  Congress  could  be 
made  to  realize  that  the  loan  policy  was  proving  disas- 
trous. The  interest  rate  had  to  be  increased  and  the  dis- 
count at  which  the  bonds  sold  was  becoming  more  marked. 
When  Congress  became  convinced,  near  the  end  of  1863, 
that  resort  must  be  made  to  other  than  borrowing,  a 
vigorous  tax  plan  was  pursued,  with  most  gratifying  re- 
sults. Not  only  was  it  demonstrated  that  the  citizens 
seemed  willing  to  meet  the  tax  burden,  but  that  many 
appeared  anxious  to  do  so.  Had  this  vigorous  tax  policy 
been  pursued  earlier  in  the  conflict,  the  credit  of  the 
government,  without  question,  would  have  remained  more 

30 


464  OUTLINES  OF  PUBLIC  FINANCE 

firm,  the  effect  of  which  upon  the  South  and  upon  foreign 
countries  would  have  been  quite  salutary. 

232.  The  United  States  Made  Extensive  Use  of  Taxes 
in  Financing  the  Great  War. — In  a  discussion  of  methods 
used  to  finance  war,  those  used  by  the  various  countries 
to  provide  funds  for  the  recent  world  conflict  command 
the  interest  of  students  of  fiscal  problems.  A  brief  review 
of  some  of  the  more  important  attempts  to  secure  revenue 
in  the  principal  combating  countries  is  all  that  can  be 
undertaken  here.  Neither  is  there  space  for  any  extended 
criticism  of  these  measures. 

Revenue  Act  of  1916. — The  United  States,  in  reality, 
began  her  provision  for  war  revenue  before  a  state  of  war 
actually  existed.  The  Revenue  Act  of  1916  was  largely  a 
preparedness  measure,  as  was  also  in  some  respects  the 
Revenue  Act  of  1914.  The  revenue  provisions  of  the  law 
of  1916  dealt  particularly  with  income  taxes,  inheritance 
taxes,  a  tax  on  the  manufacture  of  munitions,  and  some 
miscellaneous  taxes.  The  changes  in  the  income  tax  were 
noted  in  the  chapter  on  Income  Taxes.1  The  inheritance 
tax  was  introduced  as  a  Federal  measure  for  the  first  time 
since  1902.  The  tax  was  imposed  upon  the  transfer  of 
the  entire  net  estate,  less  certain  allowances,  rather  than 
upon  the  amount  of  each  share,  and  made  no  differentia- 
tion between  collateral  and  direct  heirs.  The  rate  was 
progressive  from  1  to  10  per  cent,  and  the  gradations 
ranged  from  $50,000  to  $5,000,000.  A  tax  of  12J^  per  cent 
was  placed  upon  the  net  profits  of  manufacturers  of 
munitions.  Under  the  title  of  miscellaneous  taxes  the 
duties  were  increased  upon  a  number  of  commodities,  such 
as  liquors  and  tobacco,  and  some  changes  were  made  in  the 
treatment  of  corporations,  amusement  houses,  and  brokers. 

This  law  was  amended  in  some  ways  before  it  was  made 
the  basis  for  the  War  Revenue  Act,  signed  October  3, 1917 — 
the  one  real  revenue  Act  of  the  war.  The  Act  contained  thir- 
teen  provisions,  most  of  them  dealing  with  various  classes 

igee.  303. 


FINANCING  AN  EMERGENCY  465 

of  taxes.  The  provisions  of  this  law  did  not  repeal  previous 
legislation,  but,  with  a  few  exceptions,  supplemented  it  for 
the  purpose  of  securing  a  war  revenue.  The  most  impor- 
tant item  in  the  Act  were  titles  I  and  II,  which  dealt  with 
income  taxes  and  excess  profits  taxes,  respectively. 

Income  Tax  of  1 91 7. 1— Drastic  changes  were  made  in 
the  taxation  of  incomes.  To  the  normal  rate  of  2  per 
cent,  under  the  1916  law,  there  was  added  another  normal 
rate  of  2  per  cent  for  war  purposes.  The  exemptions, 
moreover,  were  reduced  from  $3,000  and  $4,000  to  $1,000 
and  $2,000.  This  placed  a  normal  tax  of  4  per  cent  on 
all  incomes  of  more  than  $3,000  or  $4,000.  The  Act 
imposed  a  surtax  to  be  added  to  the  additional  taxes  im- 
posed by  the  former  laws.  The  number  of  grades  was 
large,  and  the  rates  steeply  progressive,  from  1  per  cent 
on  the  amount  of  income  between  $5,000  and  $7,500,  to 
50  per  cent  on  the  amount  of  income  over  $1,000,000. 
Most  incomes  were  thus  subject  to  four  taxes.  The  in- 
come of  more  than  $1,000,000  of  an  unmarried  person  was 
subject  to  the  normal  tax  of  2  per  cent  on  all  income  above 
$3,000,  and  the  war  normal  of  2  per  cent  on  all  over  $1,000. 
To  this  was  added  the  additional  taxes  up  to  13  per  cent 
on  the  various  grades  of  income,  followed  by  the  war  sur- 
plus taxes  up  to  50  per  cent  on  the  amount  of  income  over 
$1,000,000.  This  made  a  total  income  tax  which  ap- 
proached, but  of  course  fell  somewhat  short  of,  67  per  cent — 
an  extreme  which  was  approximated  in  no  other  country. 

Excess  Profits  Tax. — The  use  of  taxes  upon  excess 
profits  was  practically  an  innovation  in  our  fiscal  policy. 
The  embryo  of  this  might  be  found,  however,  in  the  tax 
on  the  profits  of  munition  manufacturers,  which  began  to 
take  definite  form  in  the  March,  1917,  Revenue  Act.  The 
tax  was  evidently  designed  to  take,  for  the  benefit  of  the 
government,  a  part  of  the  profits  created  by  the  war. 
The  rule  provided  for  arriving  at  excess  profits  was  to 
deduct  the  average  rate  of  profits  earned  upon  the  capital 
invested  in  the  three  pre-war  years  (1911-1913),  provided 

1  For  changes  made  in  1921  see  note  p.  483. 


466  OUTLINES  OF  PUBLIC  FINANCE 

this  rate  was  between  7  and  9  per  cent.  Whatever  the 
previous  return,  however,  the  minimum  deduction  in  any 
case  was  7  per  cent,  and  the  maximum  9  per  cent.  The 
tax  applied  to  corporations,  partnerships,  and  individuals, 
the  only  distinction  being  that  the  maximum  exemption 
allowed  to  corporations  was  somewhat  smaller  than  that 
allowed  to  individuals  and  partnerships.  The  rates  were 
progressive,  according  to  the  following  schedule: 

Per  Cent  Profit  Rate  of  Tax 

Between  7  to  9  and  15 20  per  cent 

"    15      "  20 25  "   " 

"    20      "  25 35  "   " 

25      "  33 45  "   " 

Over    33 60  "   " 

Inheritance  Tax  and  Other  Provisions. — Another  impor- 
tant modification  of  the  previous  law  was  the  increase  in 
the  inheritance  tax  rates.  The  1916  schedule  of  rates  had 
been  modified  earlier  in  the  year  to  range  from  lj/2  to  15 
per  cent.  By  the  revenue  law  under  discussion,  additional 
rates  were  imposed  upon  the  same  grades  from  J^2  of  1 
per  cent  on  the  lowest  grade  to  10  per  cent  on  the  highest 
—the  amount  by  which  a  bequest  exceeded  $10,000,000. 
The  maximum  inheritance  tax  which  could  be  collected, 
therefore,  would  be  25  per  cent. 

Other  provisions  of  the  Act,  which  can  only  be  indicated 
here,  were  concerned  with  increasing  tax  rates  upon  goods 
which  were  already  taxed,  and  with  tapping  new  sources 
of  revenue.  The  taxes  upon  distilled  spirits,  beer,  and 
tobacco  were  raised  materially.  The  search  for  new 
sources  of  revenue  resulted  in  the  placing  of  tax  levies  in 
many  new  and  unexpected  fields.  Freight,  express,  and 
passenger  transportation,  and  telegraph  and  telephone 
messages,  were  made  taxable.  The  manufacturers  of  a 
large  class  of  semiluxuries,  such  as  automobiles,  musical 
instruments,  jewelry,  sporting  goods,  and  many  other 
articles,  were  required  to  pay  a  tax  on  their  product.  A 
10  per  cent  tax,  to  be  paid  by  the  purchaser,  was  placed 
upon  tickets  of  admission,  and  also  upon  the  dues,  initia- 


FINANCING  AN  EMERGENCY  467 

tion,  and  membership  fees  of  various  clubs.  Postal  rates 
were  modified  so  as  to  bring  a  greater  return,  and  a  long 
list  of  legal  papers  were  made  subject  to  stamp  taxes. 

Revenue  Act  of  1918. — Just  as  some  of  the  measures 
enacted  before  the  opening  of  hostilities  should  be  classed 
as  war  legislation,  so  the  revenue  measure  which  was 
passed  within  a  few  weeks  after  the  signing  of  the  armis- 
tice was  in  large  part  a  war  revenue  bill.  It  was  largely 
formulated  before  hostilities  ceased,  and  the  need  for 
huge  expenditures  did  not  stop  with  the  signing  of  the 
armistice.  The  previous  revenue  bill  was  closely  followed, 
and  only  a  few  of  the  more  important  changes  can  be 
noticed.  The  law  of  1918  modified  the  income  tax  sched- 
ule as  to  normal  rates,  which  were  to  be  6  per  cent  on  the 
first  $4,000  income  above  the  exemption,  and  12  per  cent 
on  the  remainder.  The  exemptions  remained  the  same 
as  in  the  preceding  law,  except  that  $200  was  now  allowed 
for  each  dependent  instead  of  for  each  dependent  child. 
In  each  succeeding  year  after  the  1919  income  tax  pay- 
ment, the  normal  rates  are  to  be  4  and  8  per  cent,  respec- 
tively, while  the  surtax  rates  remain  the  same.  The 
graduation  was  slightly  modified  and  strengthened,  so 
that  the  maximum  surtax  is  65  per  cent. 

Under  the  law  of  1918  the  income  of  an  unmarried  per- 
son of  over  $1,000,000  for  the  calendar  year  of  1918 
would  be  subject  to  the  6  per  cent  normal  tax  on  $4,000, 
and  the  12  per  cent  normal  tax  on  $995,000.  In  addition 
to  these  normal  taxes  there  were  the  surtaxes  on  the  dif- 
ferent grades  up  to  65  per  cent  on  the  amount  over  $1,- 
000,000.  This  made  the  total  tax  approach  the  limit  of 
77  per  cent.  Since  there  was  an  exemption,  and  only  a 
6  per  cent  normal  tax  on  $4,000,  and  since  all  the  grades 
were  not  subject  to  the  65  per  cent  surtax,  the  total  tax 
would  be  much  less  than  77  per  cent  of  the  entire  income. 

The  excess  profits  tax  was  somewhat  clarified  and  modi- 
fied under  this  new  legislation,  and,  due  to  the  pressure 
from  the  states,  the  rates  on  inheritances  were  lowered. 


468  OUTLINES  OF  PUBLIC  FINANCE 

The  reductions  are  in  the  lower  grades,  for  the  rate  on  the 
amount  of  inheritance  over  $10,000,000  is  still  25  per 
cent.  Taxes  were  extended  to  a  number  of  consumption 
goods,  either  with  the  hope  of  securing  revenue  or  of  dis- 
couraging the  purchase  of  goods.1 

Corporation  Taxes. — Under  each  of  these  revenue  Acts 
the  tax  upon  the  net  income  of  corporations  was  increased. 
The  1916  law  placed  it  at  2  per  cent,  while  the  Act  of  1917 
imposed  an  additional  tax  of  4  per  cent,  making  a  total 
tax  of  6  per  cent.  The  Act  of  1919  went  still  farther  and 
made  the  rate  12  per  cent  for  the  calendar  year  of  1918, 
and  10  per  cent  for  each  succeeding  year.  Many  details 
exist  in  the  law  as  to  exemptions,  deductions,  evasions, 
calculation  of  income,  and  administrative  procedure. 

233.  Administrative  Problems  Developed  from  the  Tax 
Laws. — Such  a  wide  expansion  of  existing  taxes  and  the 
adoption  of  so  many  new  forms  of  revenue  precipitated, 
as  might  be  expected,  a  number  of  problems  with  which 
the  administrative  officials  had  to  cope.  It  was  extremely 
fortunate,  however,  that  the  income  tax  was  already  in 
operation,  that  its  administrative  machinery  was  organ- 
ized, and  that  it  was  capable  of  such  a  wide  expansion. 
The  difficulties  which  arose  from  the  extensive  use  of  this 
tax  were  therefore  reduced  to  a  minimum. 

Much  difficulty  arose,  however,  in  obtaining  satisfac- 
tory results  from  the  excess  profits  tax.  Profits  were  to  be 
calculated  on  the  amount  of  invested  capital,  but  the 
amount  of  invested  capital  was  not  always  easy  to  deter- 
mine. The  administrative  machinery  became  swamped 
with  cases  held  under  advisement,  and  millions  of  dollars 
of  potential  revenue  were  held  up  until  proper  adjustments 
could  be  made.  The  progressive  levy  worked  injustice  in 
the  cases  where  the  returns  were  divided  among  several 


1  An  attempt  to  go  into  the  details  of  this  law  as  it  relates  to  incomes 
and  excess  profits  would  take  us  too  far  afield.  A  number  of  technical 
treatises  have  been  published  and  are  available  to  anyone  wishing  to  make 
a  more  thorough  study  of  these  forms  of  taxes  in  the  United  States. 


FINANCING  AN  EMERGENCY  469 

owners  as  against  a  comparatively  close  division — that  is, 
it  was  not  based  upon  the  ability  to  pay.  Difficulty  arose, 
also,  in  attempting  to  get  a  semblance  of  justice  between 
businesses  of  different  forms  of  organization.  In  the  re- 
vision, the  tax  was  made  to  apply  only  to  corporations, 
with  the  expectation  that  partnerships  would  be  reached 
through  the  individual  members.  The  arrangement,  even 
yet,  cannot  be  said  to  be  satisfactory,  and  tax  injustices 
between  close  competitors,  with  different  forms  of  busi- 
ness organization,  frequently  occur.  The  fact  that  the 
tax  was  made  one  upon  excess  profits  rather  than  upon 
profits  arising  from  war,  suggests  the  intention  that  it 
might  continue  as  a  part  of  the  peace-time  taxes.  The  fact 
that  it  retained  such  an  important  place  in  the  important 
post-war  Revenue  Act  also  points  to  the  same  conclusion. 
Much  agitation  has  arisen  for  its  repeal,  however,  and  it 
may  be  given  up  in  the  not  distant  future. 

A  nation  could  not  hope  to  make  such  an  extensive  use 
of  taxes  without  some  friction  and  dissatisfaction.  On 
the  whole,  the  taxes  fulfilled  what  was  expected  of  them. 
It  is  perhaps  true  that  more  energy  was  exerted  in  at- 
tempting to  find  fields  for  new  and  increased  taxes  than 
was  exerted  in  establishing  the  machinery  to  take  care  of 
the  taxes  as  they  were  levied.  A  large  part  of  the  dissatis- 
faction which  was  voiced  arose  from  this  cause.  There 
appeared  little  unwillingness  to  bear  tax  burdens,  but 
individuals  did  object  to  bearing  heavy  burdens  when 
others  equally  able  to  bear  burdens  were  escaping.  The 
sooner  the  administrative  machinery  can  be  so  perfected 
as  to  be  able  to  iron  out  these  inequalities,  the  more  suc- 
cessfully, extensively,  and  peacefully  can  taxes  be  used  to 
meet  the  burdens  of  reconstruction. 

234.  The  United  States  Borrowed  Extensively  During 
the  Great  War. — In  spite  of  the  strenuous  efforts  to  secure 
revenue  from  taxes,  it  was  found  necessary  to  secure  the 
larger  part  of  the  needed  funds  by  borrowing.  The  dif- 
ferent loans  were  well  organized  and  were  carried  through 


470  OUTLINES  OF  PUBLIC  FINANCE 

very  successfully.  The  existence  of  the  Federal  Reserve 
banking  system  proved  of  inestimable  worth.  The  Fed- 
eral Reserve  Act  provides  that  these  banks  could  be  made 
to  act  as  fiscal  agents  of  the  government,  and  the  Secre- 
tary of  the  Treasury  was  not  slow  in  enlisting  their  serv- 
ices. Each  of  the  twelve  reserve  banks  acted  as  centers 
and  were  responsible  for  making  the  loan  projects  success- 
ful. These  banks  and  their  members,  as  well  as  the  other 
banking  institutions,  were  enthusiastic  agents  of  the  gov- 
ernment in  taking  subscriptions  for  the  loans,  and  were 
large  purchasers  of  the  bonds  themselves.  The  advance 
of  money  and  credit  which  they  continually  made  to  the 
government  was  another  valuable  service. 

Bond  Issues. — Five  issues  of  bonds  were  floated,  and  the 
success  of  each  issue  left  nothing  to  be  desired.  Strong 
appeal  was  made,  both  to  patriotic  and  economic  senti- 
ment, and  the  pressure  exerted  at  times  was  so  strong 
that  subscription  became  more  nearly  coercive  than  vol- 
untary. Wide  publicity  was  given  through  newspaper, 
magazine,  and  poster  advertising,  as  well  as  through  short 
speeches  at  moving  picture  theaters,  churches,  and  other 
public  gatherings.  Various  organizations  throughout  the 
country  took  up  the  burden  of  enlightening  the  public 
and  securing  subscriptions  to  the  bonds.  The  issues  were 
made  in  convenient  denominations,  the  fifty  dollar  "baby 
bond"  being  especially  designed  to  attract  the  small  in- 
vestor. The  privilege  of  paying  for  the  bonds  on  the  in- 
stallment plan  was  a  further  aid  in  securing  subscriptions. 

Treasury  Certificates. — In  anticipation  of  the  return 
from  the  various  loans  and  taxes,  an  extensive  use  was 
made  of  the  treasury  certificates.  These  were  carried 
very  largely  by  the  banks,  and  were  canceled  when  the 
anticipated  revenue  was  realized.  By  this  process  the 
government  did  not  have  to  wait  for  funds,  but  was 
financed  from  the  credit  which  banks  could  extend,  and 
a  large  part  of  the  expected  revenue  was  actually  spent 
before  it  was  received.  The  total  amount  of  these  cer- 


FINANCING  AN  EMERGENCY 


471 


tificates  of  indebtedness  exceeded  the  returns  from  the 
loans.  The  sale  of  war  savings  certificates  and  thrift 
stamps  was  inaugurated  to  appeal  to  the  class  of  savers 
who  could  not  purchase  bonds,  and  incidentally  to  secure 
some  additional  revenue  from  those  who  had  made  bond 
purchases.  The  post  office  was  used  extensively  as  the 
agent  for  these  sales. 

Success  of  Loan  Policy. — This  brief  outline  of  our  loan 
policy  cannot  but  bring  into  contrast  the  effectiveness  of 
the  methods  employed  as  compared  with  those  used  in 
attempting  to  secure  loans  at  the  time  of  the  Civil  War. 
The  possibility  of  employing  private  agencies  was  seized 
eagerly,  and  every  possible  means  was  used  to  create  a 
desire  for  the  securities.  Recognition  was  made  of  the 
fact  that,  in  order  for  the  public  to  buy,  they  must  either 
be  supplied  with  what  they  want,  or  be  made  to  want 
what  is  supplied.  Not  only  were  the  bonds  made  attrac- 
tive, but  every  effort  was  made  to  create  desire  for  them. 
Even  the  titles — Liberty  Loan  to  each  of  the  first  four 
issues,  and  Victory  Loan  to  the  fifth — indicate  that  a 
psychological  appeal  was  intended.  Some  of  the  varia- 
tions in  the  bonds,  together  with  the  success  of  the  issues, 
is  indicated  in  the  following  table : l 


•8 

Date 

Amount  Ask 
in  Billions 

Amount 
Subscribed 

Amount 
Accepted 

Number  of 
Subscribers 

Is 

!* 

Redeem- 
able or 
Payable 

June  15,  '17 
Nov.  15,  '17 

2 
3 

$3,035,226,850 
4,617,532,300 

$2,000,000,000 
3,808,766,150 

4,500,000 
9,420,000 

3.5 
4 

1922-47 
1927-42 

May     9,  '18 

3 

4,176,516,850 

4,176,516,850 

18,376,000 

4.25 

1928 

Oct.    24,  '18 

6 

6,993,073,2,50 

6,993,073,250 

21,000,000 

4.25 

1933-38 

May  21,  '19 

4.5 

5,249,908,300 

4,500,000,000 

12,000,000 

4.75 

1923-24 

1  This  table  is  given  in  practically  this  form  by  E.  L.  Bogart,  in  his  study 
Direct,  and  Indirect  Costs  of  the  Great  World  War,  under  the  allspices  of  the 
Carnegie  Endowment  for  International  Peace.  A  more  elaborate  table 
could  be  compiled  which  would  show  the  tax  exemptions  of  the  different 
issues,  the  conversion  privileges,  ete. 


472  OUTLINES  OF  PUBLIC  FINANCE 

235.  Fiscal  Problems  Did  Not  End  with  the  War. — If 
the  fiscal  problems  and  difficulties  caused  by  a  war  would 
end  with  the  war,  the  task  of  the  fiscal  official  would  be 
materially  lessened.  The  problems,  however,  do  not 
cease,  but,  on  the  other  hand,  the  return  of  peace  fre- 
quently makes  the  solution  of  the  problems  more  diffi- 
cult. The  cessation  of  hostilities  does  not  immediately 
disband  armies  or  pay  interest  on  a  huge  public  debt,  so 
that  war  expenditures  really  last  much  longer  than  the 
war.  The  end  of  the  war,  however,  produces  a  change  in 
the  nature  of  the  taxpayer.  Taxes  that  were  willingly 
paid  while  the  war  was  in  progress  are  now  evaded  or 
grudgingly  paid.  The  low  prices  of  the  readjustment 
period  make  taxpaying  all  the  more  burdensome  and  dis- 
tasteful. Some  important  sources  of  revenue,  such  as 
excess  profits  or  war  profits,  begin  to  melt  away.  Legisla- 
tors are  confronted  with  the  problem,  then,  of  readjusting 
the  revenue  system  so  that  a  sufficient  amount  of  funds 
will  be  received  with  as  little  injustice  and  objection  as 
possible. 

Many  Changes  Suggested. — There  has  been  no  dearth 
of  remedies  suggested  to  Congress  as  a  cure  for  the  pres- 
ent ailments  in  the  fiscal  system.  Some  have  suggested 
that  a  tax  on  the  undistributed  earnings  of  corporations, 
and  a  flat  tax  on  corporation  profits  or  incomes,  be  sub- 
stituted for  the  now  dwindling  and  highly  unsatisfactory 
excess  profits  tax.  Another  suggestion  has  been  to  re- 
model the  tariff  on  a  purely  revenue  basis.  Some  have 
advocated  a  tax  on  gasoline  as  well  as  one  of  varying 
amounts  on  the  owners  of  passenger  automobiles.  An  in- 
creased taxation  of  land  values,  especially  upon  those  of 
unimproved  land,  has  had  its  share  of  advocates.  Opin- 
ion has  generally  been  favorable  to  the  removal  of  the 
excess  profits  tax  and  the  higher  surtaxes  on  personal 
incomes. 

Secretary  of  the  Treasury  Mellon  made  some  recom- 
mendations to  Congress  for  remedying  the  situation.  He 


FINANCING  AN  EMERGENCY  473 

would  repeal  the  excess  profits  tax  and  make  good  the 
loss  of  revenue  by  means  of  some  other  tax  on  corporation 
profits  or  by  an  addition  to  the  income  tax  on  corpora- 
tions. He  would  readjust  the  income  tax  rates  so  that 
for  1921  the  maximum  combined  normal  and  surtaxes 
would  be  40  per  cent,  and  33  per  cent  thereafter.  He 
asked  for  the  retention  ofcmany  of  the  sales  taxes,  such  as 
those  on  transportation*;  admissions,  and  such  goo3s  as 
tobacdo,  but  asked  for  the  elimination  of  those  thgt  had 
proved  a  nuisance,  such  as  taxes  upon  sales  at  soda  foun- 
tains. 

Advantages  of  Sales  Tax. — One  of  the  most  strongly 
advocated  and  widely  discussed  changes  has  been  for  the 
adoption  of  a  general  sales  or  turnover  tax.  This  might 
take  a  number  of  forms,  but  the  plan  that  has  been  most 
widely  advocated  has  been  a  1  per  cent  tax  upon  all 
sales  of  whatever  nature.  The  Tax  League  of  America 
has  set  forth  the  following  arguments  in  favor  of  the  sales 
tax:  (1)  It  will  undoubtedly  produce  all  the  revenue 
needed.  (2)  Under  it  the  flow  of  revenue  will  be  prompt, 
constant,  and  dependable.  (pj^It  willjbgjpaid  by  the 
whole  body  of  thepeojple,  but  m  infinitely  small  amounts, 
by  each  individual.  (4)  It  is^jmple  i^  operation  and  will 
be  promptly,  completely,  and  economically  collected, 
without  burdening  anybody.  (5)  When  supplemented  by 
^moderate  income  tax  it  will  rest  equitably  upon  all. 
(6)  It  will  abolish  the  present  harmful  method  of  class 
taxation,  and  business  will  promptly  get  back  on  its  feet 
and  prosperity  return.  (7)  It  will  reduce  the  high  cost  of 
living  without  reducing  the  profits  of  the  producer. 

iSany  advocates  of  the  tax  refer  to  its  successful  use  in 
other  countries,  such  as  the  Philippines,  Canada,  and 
France.  The  dissimilarities  in  the  tax  used,  or  in  the  busi- 
ness conducted,  however,  make  the  argument  from  ana- 
logy of  little  weight. 

Objections  to  Sales  Tax. — The  favor  with  which  the 
proposition  of  a  sales  tax  was  at  first  received  decreased 


474  OUTLINES  OF  PUBLIC  FINANCE 

materially  as  it  became  more  generally  studied  and  dis- 
cussed. The  important  objections  that  have  been  brought 
out  have  been  summed  up  as  follows:  (JTJ)  The  general 
sales  tax  is  essentially  unjust  in  that  it  is  a  tax  levied  ac- 
cording to  needs  rather  than  according  to  ability  to  pay. 
(2)  The  general  sales  tax  is  grossly  discriminatory.  In 
so  far  as  "the  tax  cannot  be  shifted,  it  is  distributed  accord- 
ing to  gross  income,  which  furnishes  no  measure  of  tax- 
paying  ability.  The  tax  treats  as  being  alike  transactions 
which  are  fundamentally  unlike;  it  subjects  to  very  un- 
equal risks  taxpayers  in  substantially  similar  positions; 
it  affords  an  indefensible  bounty  to  the  large,  integrated 
industry,  as  compared  with  smaller  industrial  units.  (3) 
The  tax  rests  upon  an  artificial  basis  in  that  it  turns  upon 
the  mere  form  of  business  transactions,  and  would  lead 
to  undesirable  changes  in  business  practice.1 

Shifting  and  Incidence. — One  of  the  most  common  and 
weighty  objections  to  the  sales  tax  as  well  as  to  most 
forms  of  corporation  taxes  is  that  the  burden  will  be 
shifted  to  the  consumer.  Consequently,  the  mass  of  the 
population  with  small  and  moderate  incomes  will  be  bear- 
ing the  bulk  of  the  tax  burden.  This  appears  particularly 
objectionable  in  the  sales  tax,  since  it  is  thought  all  the 
taxes  on  sales  from  the  production  of  the  raw  materials 
to  the  final  disposal  of  the  finished  product  will  be  pyra- 
mided and  rest  on  the  consumer.  The  American  Federa- 
tion of  Labor  and  numerous  other  organizations  are,  con- 
sequently, opposed  to  the  introduction  of  the  sales  tax. 
^Protests  have  also  been  registered  by  a  number  of  manu- 
facturers' and  merchants'  associations,  which  would  indi- 
'cate  that  they  are  not  so  sure  about  the  possibilities  of 
shifting  the  burden. 

The  same  underlying  principles  of  shifting  and  incidence 
that  were  discussed  in  Chapter  VIII  apply  to  sales  taxes 
and  the  various  taxes  on  corporations.  The  laws  of  price 

1  Arthur  A,  Ballantine,  The  Annals  of  (he  American  Academy  of  Political 
and  Social  8ciencet  vol  xov,  p.  214, 


FINANCING  AN  EMERGENCY  475 

are  the  determining  factors.    No  one  will  want  a  good  to 
any  greater  extent  because  it  is  taxed,  and  consequently 
will  be  willing  to  pay  no  more  for  it*   In  case  the  demand 
for  the  good  be  very  inelastic,  then  it  will  be  possible  to 
shift  practically  the  entire  burden  and  dispose  of  the  same 
number  of  goods.    A  review  of  the  principles  upon  whicrA 
the  shifting  of  taxes  is  based  will  indicate  that  it  is  impos-  | 
sible  to  categorically  state  whether  or  not  sales  taxes  and  ] 
corporation  taxes  will  be  shifted. 

236.  England  Financed  the  War  Through  a  Combina- 
tion of  Loans  and  Taxes. — The  war  came  upon  England 
as  a  bolt  from  the  clear  sky,  and  she  consequently  had  no 
time  to  put  her  fiscal  house  in  order  to  meet  the  unwel- 
come guest.  The  first  problem  which  presented  itself, 
and  which  demanded  quick  action,  was  the  protection  of 
the  domestic  financial  institutions  and  of  the  country's 
gold  supply.  This  the  government  attempted  to  do  by 
setting  aside  the  note  issue  requirements  of  the  Peel  Act, 
issuing  a  paper  currency  which  was  loaned  to  the  banks, 
raising  the  rate  of  discount  at  the  Bank  of  England,  and 
closing  the  Stock  Exchange.  When  these  objects  were  ac- 
complished, attention  was  turned  to  securing  needed 
funds.  The  first  measures,  however,  indicate  a  striking 
feature  of  the  war  policy  in  that,  throughout  the  war,  a 
rapid  increase  in  the  amount  of  paper  currency  was  in 
evidence. 

Loan  Policy. — The  first  use  of  the  loan  policy  was  in 
the  issue  of  short-term  treasury  obligations  which  were 
readily  discounted  at  the  banks.  The  paralyzed  condition 
of  industry  had  increased  the  funds  in  the  banks  to  such 
an  extent  that  the  chance  to  use  them  in  this  way  was 
welcome.  The  rapidly  growing  needs,  however,  could  not 
be  long  sustained  by  the  treasury  certificates,  and  long- 
term  bonds  were  issued  early.  Several  other  issues  of 
bonds  were  made,  with  varying  rates  of  interest  and  tax 
exemptions.  An  extensive  use  of  the  treasury  certificates 
was  made,  however,  throughout  the  war.  Borrowing 


476  OUTLINES  OF  PUBLIC  FINANCE 

abroad  was  also  carried  on  to  some  extent.  As  in  the 
United  States,  small  savings  were  secured  through  war 
savings  certificates — a  feature  which  was  urged,  however, 
more  extensively  than  in  this  country. 

The  English  plan  of  borrowing  incorporated  some  pecul- 
iar features  which  are  of  interest.  The  short-term  obliga- 
tions were  not  offered  entirely  to  the  banks,  but  were 
open  to  purchase  by  the  public  after  the  first  few  months 
of  hostilities.  The  sale  was  generally  at  a  rate  favorable 
to  the  government.  During  the  latter  part  of  the  war  a 
continuous  short-term  obligation  and  bond  sale  was  in- 
augurated. The  advantage  claimed  for  this  was  that  it 
did  away  with  the  expense  and  excitement  of  particular 
drives.  Special  subscription  days  and  weeks  were  fre- 
quently inaugurated,  however,  and  enthusiastic  individ- 
uals would  sometimes  offer  prizes  to  those  who  would 
draw  securities  with  a  certain  number.  The  revenue  from 
this  continuous  sale  generally  proved  to  be  satisfactory  in 
amount.  England,  of  course,  was  interested  in  securing 
credit  in  this  country  to  enable  her  to  purchase  goods. 
One  method  by  which  she  accomplished  this  was  to  buy 
up  American  securities  from  her  subjects  with  the  pay- 
ment of  short-term  obligations,  and  in  turn  using  these  as 
collateral  to  obtain  credit  here. 

Tax  Policy. — The  fiscal  officials  were  severely  criticized 
in  many  quarters  for  not  making  a  heavier  use  of  taxes. 
Precedent  had  been  set  of  meeting  nearly  half  of  such 
extraordinary  needs  from  taxes,  and  many  considered 
that  the  precedent  should  not  be  broken.  As  the  war 
progressed,  taxes  tended  to  form  a  larger  part  of  the  bud- 
get. The  budget  had  been  passed  shortly  before  the  out- 
break of  the  war,  and  was  not  remodeled.  Substantial 
increases  in  revenue  over  the  previous  budget  were  pro- 
vided, however,  for  the  purpose  of  carrying  out  an  exten- 
sive social  program.  The  increases  in  the  next  budget 
were  slight,  consisting  in  small  increases  in  the  taxes  on 
incomes,  tea,  and  beer. 


FINANCING  AN  EMERGENCY  477 

The  appalling  increase  in  expenditures,  and  the  increas- 
ing strain  upon  the  credit  machinery,  caused  the  recogni- 
tion of  the  need  for  heavier  taxes.  The  normal  income 
tax  was  raised  to  over  17  per  cent,  and  the  exemption  was 
lowered  to  about  $650.  The  rates  of  the  supertax  were 
also  raised.  In  addition,  a  war  profits  tax  was  inaugu- 
rated. This  took  50  per  cent  of  the  profits  which  arose 
from  war  activities.  It  differed  from  the  excess  profits 
tax  of  the  United  States  in  that  it  did  not  attempt  to 
reach  abnormal  profits  except  as  they  arose  from  the  war. 
In  order  that  those  with  incomes  of  less  than  the  exemp- 
tion amount  might  help  share  the  burden,  the  tax  upon 
generally  consumed  goods  was  raised  50  per  cent.  The 
budget  of  the  following  year  placed  a  progressive  rate  upon 
incomes  which  reached  25  per  cent  for  those  over  $12,500, 
while  the  war  profits  tax  was  iner eased  to  60  per  cent. 
The  rates  on  consumable  goods  were  raised  and  more 
commodities  were  added  to  the  taxable  list.  Somewhat 
later  the  war  profits  tax  was  increased  to  80  per  cent, 
while  the  last  budget  that  properly  can  be  called  a  war 
budget  increased  income  taxes  slightly  and  introduced 
taxes  upon  luxuries. 

237.  The  Revenue  of  France  Was  Secured  Largely  by 
Borrowing. — The  opening  of  the  war  found  France  in  a 
very  different  economic  condition  than  that  which  pre- 
vailed in  England.  The  finances  were  none  too  sound, 
and  the  current  revenue  was  not  meeting  current  expendi- 
tures, while  a  bond  issue  had  been  provided  to  make  up 
the  deficiency.  Payment  on  this  bond  issue  was  to  be 
made  in  installments,  two  of  which  had  been  made  at  the 
outbreak  of  the  war.  The  general  derangement  after  this 
event  put  the  treasury  in  a  condition  of  distress;  first, 
because  individuals  could  not  secure  funds  to  meet  the 
remaining  installments  on  their  loan  subscription,  and, 
second,  because  the  occupation  of  one  of  the  richest  sec- 
tions of  France  wiped  out  the  accustomed  revenue  from 
this  territory.  The  problem  of  France  at  first  was  much 


478  OUTLINES  OF  PUBLIC  FINANCE 

the  same  as  that  of  England — to  stabilize  the  domestic 
credit  system.  This  she  attempted  to  do  through  regulat- 
ing the  withdrawal  of  bank  deposits,  closing  and  super- 
vising the  Stock  Exchange,  and  declaring  a  moratorium. 

Bank  Aid  and  Loans. — Those  who  are  acquainted  with 
the  nature  of  the  bank  of  France  would  expect  the  govern- 
ment to  rely  upon  it  extensively  for  aid,  which  proved  to 
be  the  situation  throughout  the  war.  This  aid  was  given 
through  the  large  loans  to  the  government,  and  through 
the  large  increase  in  the  number  of  bank  notes.  The  en- 
larged mass  of  this  cheap  currency  began  to  endanger  the 
gold  supply,  and  specie  payments  were  stopped.  So  much 
of  the  specie  had  been  hoarded  that  a  scarcity  of  money 
for  small  transactions  was  felt  and  paper  notes  of  small 
denominations  were  struck.  The  needs  of  the  government 
soon  outgrew  any  aid  the  banks  could  give,  and  treasury 
bills  were  issued  and  sold  both  at  home  and  abroad.  Their 
insufficiency  was  soon  manifest,  and  resort  was  made  to 
long-term  loans.  Because  of  the  weakened  credit  condi- 
tions, the  terms  upon  which  they  could  be  sold  were  un- 
favorable to  the  government.  Citizens  loaned  their  Amer- 
ican securities  to  the  government,  and  these  were  used  as 
collateral  in  securing  credit  from  America.  The  entrance 
of  the  United  States  into  the  war,  and  the  subsequent  ex- 
tension of  credit,  improved  the  situation. 

Tax  Measures. — Nothing  was  done  for  more  than  a 
year  after  the  outbreak  of  hostilities  to  increase  the  rev- 
enue from  taxes,  but  the  authorities  were  finally  driven 
to  adopt  more  stringent  tax  measures.  The  income  tax, 
adopted  two  years  before,  became  operative  in  1916.  The 
rate  was  2  per  cent,  but  the  exemptions  were  so  arranged 
as  to  make  it  progressive.  The  war  profits  tax  was  also 
inaugurated  in  1916  after  much  opposition,  and  imposed  a 
50  per  cent  tax  on  such  returns.  At  the  same  time  various 
other  new  taxes  were  levied,  while  some  of  the  old  rates 
were  increased.  In  1917  still  other  new  taxes  were  imposed 
on  business  profits,  and  on  the  turnover  in  retail  establish- 


FINANCING  AN  EMERGENCY  479 

ments.  Other  rulings  were  that  taxes  should  be  placed 
upon  agricultural  profits,  salaries,  and  similar  returns. 
Had  this  policy  been  adopted  earlier,  the  credit  of  the 
nation  would  doubtless  have  remained  more  firm. 

Other  Allied  Countries. — The  fiscal  policy  of  the  other 
Entente  allies  was  just  as  indefinite,  but  space  does  not 
permit  a  review  of  the  systems  used.  Suffice  it  to  point 
out  that  Canada,  after  appealing  to  banks  for  aid,  started 
a  vigorous  system  of  taxes  which,  of  course,  did  not  prove 
adequate,  and  loans  were  resorted  to  at  various  tunes. 
In  Australia  public  works  were  being  built  with  borrowed 
funds,  yet  her  war  loans  were  successful,  as  was  also  the 
income  tax.  In  Russia  taxes  were  used  only  sparingly, 
but  most  reliance  was  put  upon  loans  and  the  issue  of 
paper.  In  Italy,  first  resort  was  taken  to  aid  from  banks, 
followed  by  the  use  of  both  new  and  old  taxes  to  secure 
revenue.  A  liberal  amount  of  borrowing  was  also  done. 

238.  The  Central  Powers  Used  Loans  Most  Extensively. 
— Germany,  unlike  the  allied  nations,  entered  the  war 
with  closely  laid  fiscal  plans,  which  had  been  formulated 
and  developed  through  long  years  of  preparation.  The 
method  for  securing  funds  was  based  upon  the  military 
plan  of  a  short  and  victorious  war,  with  large  indemnities 
hi  settlement.  The  reliance  upon  an  extensive  system  of 
credit  instruments  was  the  result,  the  expectation  being 
to  redeem  these  with  the  funds  secured  from  the  indemni- 
ties. The  defeat  of  the  military  program  was  consequently 
reflected  in  the  breakdown  of  the  fiscal  program. 

Preparatory  Measures. — The  credit  machinery  which 
was  in  existence  at  the  declaration  of  the  war,  or  which 
was  immediately  put  into  existence,  showed  that  careful 
preparation  had  been  made  for  such  a  crisis.  A  few  months 
before  the  break,  the  amount  of  gold  in  the  war  chest  had 
been  increased  from  $21,000,000  to  more  than  $50,000,000. 
Systematic  attempts  had  been  made  for  some  years  to 
increase  the  gold  reserve  of  the  country  as  a  basis  for  the 
issue  of  notes  when  the  need  came.  The  central  banking 


480  OUTLINES  OF  PUBLIC  FINANCE 

institution  had  been  given  more  extensive  control  over  the 
banking  machinery  of  the  country  in  order  that  the  gov- 
ernment might  be  better  able  to  control  the  gold  fund. 
Some  preparatory  attempts  were  even  made  to  prevent 
the  disturbance  in  the  money  market  which  usually  ac- 
companies the  opening  of  hostilities. 

The  outbreak  of  the  war  called  into  clear  relief  the 
preparations  which  had  been  made,  and  their  efficacy  in 
meeting  the  demands.  In  spite  of  the  anticipations  of 
the  government,  panic  seized  many,  and  they  began  to 
demand  gold  from  the  banks.  This  led  the  central  bank 
to  suspend  specie  payments.  The  preparation  for  creating 
circulating  instruments,  however,  was  more  successful. 
The  war  chest  fund  was  transferred  to  the  bank  as  a  basis 
for  note  issue,  and  a  large  amount  of  bank  notes  continued 
to  be  issued,  which  were  made  legal  tender,  but  which 
would  not  be  redeemed  in  specie.  Along  with  these  suc- 
cessive issues  of  bank  notes,  treasury  notes  were  put  out 
by  the  government  which  were  also  made  legal  tender, 
and  denied  specie  payment.  As  might  be  expected,  the 
notes  depreciated  and  prices  became  inflated.  When 
merchants  refused  to  accept  the  notes  at  face  value,  the 
regulation  was  adopted  making  it  illegal  to  discount  cur- 
rency, whereupon  prices  went  still  higher. 

Loan  Policy. — A  vital  part  of  the  previous  preparation 
was  to  liquify  the  wealth  of  the  country  so  as  to  make 
it  available  for  the  government.  As  a  part  of  the  machin- 
ery for  accomplishing  this,  vario  usbanks  were  established 
throughout  the  country  for  the  purpose  of  extending 
credit  upon  collateral.  Stocks,  bonds,  merchandise,  and 
nearly  anything  would  be  accepted  as  the  basis  for  credit 
expansion.  A  number  of  regular  war  loans  were  floated, 
and  these  banks  were  used  extensively  to  issue  credit  as 
a  basis  for  the  purchase  of  loans.  Even  the  loans  to  be 
purchased  were  sometimes  taken  as  collateral  upon  the 
loan  made.  As  the  war  progressed,  however,  the  credit 
machinery  became  more  strained  and  the  weakness  of  the 


FINANCING  AN  EMERGENCY  481 

loan  policy  became  unsuccessful  to  an  embarrassing  de- 
gree. 

Use  of  Taxes. — As  indicated  above,  taxes  were  not  used 
in  the  earlier  years  of  the  war  because  it  was  considered 
they  were  not  needed.  It  was  thought  that  the  good  will 
of  the  citizens  would  be  increased  if  this  extra  burden  were 
not  placed  upon  them.  The  failure  of  the  military  ma- 
chine to  accomplish  its  purpose  as  scheduled,  and  the 
consequent  weakening  of  the  accepted  fiscal  policy,  led  the 
Finance  Minister,  in  desperation,  to  turn  to  taxes  as  a 
supplementary  source  of  revenue  during  the  latter  part 
of  the  struggle.  At  first  they  were  so  slight  as  to  meet 
scarcely  the  interest  charge,  but  near  the  end  of  the  war 
they  were  increased  so  as  to  secure  a  noticeable  return. 
It  should  be  noted  that  the  imperial  government  was 
somewhat  handicapped,  since  it  could  make  no  use  of 
direct  taxes.  The  first  war  taxes  were  increased  tele- 
phone, telegraph,  and  postal  rates,  as  well  as  new  taxes 
or  increased  rates  upon  war  receipts,  tobacco,  bills  of 
lading,  and  a  few  other  articles.  Later  these  rates  were 
raised,  and  duties  were  levied  upon  railway  tickets  and 
coal.  When  the  war  was  nearly  over  a  much  more  ex- 
tensive use  of  taxes  was  attempted,  and  business  transac- 
tions, beverages,  and  many  luxuries  were  subject  to  taxa- 
tion. The  revenue  from  these  sources,  while  not  great  in 
proportion  to  the  need,  aided  somewhat  hi  establishing  a 
firmer  fiscal  system. 

System  in  Austria  and  Hungary. — The  fiscal  systems 
used  in  Austria  and  Hungary  followed  closely  that  de- 
scribed for  Germany,  yet  more  importance  was  attached 
to  taxes  than  was  found  in  Germany.  The  impaired  state 
of  the  finances  at  the  opening  of  hostilities  made  it  more 
difficult  to  carry  out  a  sound  policy  for  meeting  the  war 
needs.  Bank  credits  and  national  loans  were  relied  upon 
extensively,  which  resulted  in  a  marked  depreciation  of 
the  currency.  This,  it  seemed,  the  taxes  could  not  pre- 
vent. The  direct  tax  on  incomes  was  the  principal  source 


482  OUTLINES  OF  PUBLIC  FINANCE 

of  revenue,  although  taxes  were  placed  upon  other  bases. 
The  rate  on  incomes  was  extremely  high,  as  were  those  on 
directors'  fees,  land  revenues,  etc.  The  tardy  introduc- 
tion of  extensive  taxes,  however,  could  not  overcome  the 
bad  fiscal  situation  which  had  been  caused  by  the  borrow- 
ing policy. 

239.  The  Methods  Used  by  the  Different  Countries 
Present  Interesting  Comparisons. — The  fiscal  systems  of 
no  two  countries  were  exactly  alike,  yet  no  purpose  would 
be  served  in  outlining  that  used  in  any  except  the  more 
important  belligerents.  The  interest  in  these  countries 
attaches  to  the  amount  of  revenue  raised,  the  methods 
used  in  raising  it,  and  the  general  effect  on  the  citizenship. 
Interest  attaches  also  to  the  method  of  publicity  for 
securing  loan  subscribers,  and  to  what  extent  loans  were 
used  in  proportion  to  taxes.1 

The  United  States  and  Great  Britain  stand  out  pre- 
eminently as  the  two  countries  that  placed  most  reliance 
upon  taxes.  Reasons  for  this  in  the  United  States  might 
be  that  she  had  more  time  to  prepare  before  entering  the 
conflict.  Many  so-called  authorities  advocated  a  pay- 
as-you-go  policy,  which  no  doubt  had  an  influence.  The 
net  result,  however,  was  that  loans  greatly  exceeded  the 
amount  secured  from  taxes.  As  a  whole,  probably  a  little 
less  than  one  third  of  the  revenue  was  raised  from  taxes. 

England's  precedent  in  using  so  large  a  proportion  of 
taxes  to  finance  a  previous  war  gave  her  an  ideal  toward 
which  to  work,  and  this  no  doubt  had  much  to  do  with  the 
expansion  of  her  tax  system.  The  unexpected  demand, 
of  course,  could  only  be  met  by  credit  until  the  tax  system 
could  be  put  into  operation.  This  was  done  quite  effec- 
tively, however,  and  about  the  same  proportion  of  the 
entire  fund  was  raised  from  this  source  as  in  the  United 
States.  In  both  countries  the  results  of  inflation  from 
the  issue  of  more  bank  notes,  and  the  many  securities,  was 

1  For  an  interesting  comparison  of  the  sources  of  revenue  of  the  impor- 
tant countries,  see  table  on  p.  497. 


FINANCING  AN  EMERGENCY  483 

quickly  reflected  in  the  rapidly  rising  prices.  France  did 
not  use  taxes  early  in  the  conflict,  but  strongly  favored 
borrowing,  and  this  formed  the  source  of  the  bulk  of  the 
revenue  until  the  breaking  credit  system  needed  to  be 
braced.  The  proportion  of  the  entire  expense  which  was 
met  from  taxes  was  less  than  that  of  England  or  of  the 
United  States. 

Germany  and  Austria-Hungary  form  the  best  example 
of  recent  emergency  financiering,  in  which  borrowing  and 
bank  credits  were  relied  upon  almost  exclusively.  The 
proof  that  it  does  not  work  successfully  over  a  period  of 
years,  with  an  excessive  demand  for  funds,  is  clearly 
demonstrated  by  the  events  in  these  countries.  Deprecia- 
tion of  the  currency,  a  failure  of  the  credit  machinery, 
followed  by  a  resort  to  taxes  as  a  method  of  alleviation, 
was  simply  a  repetition  of  the  story  which  has  been  writ- 
ten each  tune  that  a  nation  has  tried  to  use  borrowing 
to  excess. 

ADDITIONAL  READING 

Laughlin,  Credit  of  the  Nations. 
Bogart,  Direct  and  Indirect  Costs  of  the  War. 
Bogart,  War  Costs  and  Their  Financing. 
Annals  of  the  American  Academy  of  Political  and  Social 
Sciencej  vol.  Ixxv,  vol.  xcv,  pp.  193-220. 

NOTE: 

The  Revenue  Act  of  1921,  signed  by  President  Harding  on  November 
23,  1921,  has  made  many  important  changes.  Some  of  the  more  important 
are:  Every  individual  with  a  gross  income  of  $5,000  or  more  must  file  a 
return,  whatever  his  net  income  may  be.  The  normal  rates  of  8  per  cent 
on  net  incomes  of  more  than  $4,000,  and  of  4  per  cent  on  smaller  incomes, 
were  not  changed.  The  surtax  rates  were  changed  to  range  from  1  per  cent 
to  50  per  cent  on  net  incomes  in  excess  of  $5,000.  The  50-per-cent  rate 
applies  to  all  net  incomes  in  excess  of  $200,000.  The  exemption  allowed 
to  a  head  of  a  family  is  $2,500  if  his  net  income  is  not  in  excess  of  $5,000, 
otherwise  it  is  $2,000.  A  deduction  of  $400  is  allowed  for  each  dependent. 
The  1921  law  repeals  the  tax  on  excess  profits  and  fixes  the  tax  on  the  net 
income  of  corporations  at  12  y>  per  cent. 


CHAPTER  XX 

THE   COST  OF  WAR 

240.  The  Cost  of  War  Presents  a  Variety  of  Aspects.— 
The  Great  War  exhibited  the  most  significant  example  of 
a  fiscal  emergency  that  has  ever  confronted  the  nations  of 
the  world,  and  it  is  to  be  hoped  they  will  be  called  upon 
to  meet  no  such  emergency  in  the  future.  Few  have  any 
concept  as  to  the  burden  that  was  entailed,  and,  indeed, 
it  is  next  to  impossible  to  form  any  adequate  concept, 
because  of  the  enormity  of  the  demands  which  were  made. 
Figures  can  be  compiled  as  to  the  monetary  outlay,  but 
the  amounts  are  so  staggering  as  to  be  almost  beyond  the 
possibility  of  comprehension.  Statistics  were  omitted  in 
the  previous  chapter,  with  the  idea  that  they  would  be 
more  significant  and  important  when  viewed  as  an  at- 
tempt to  interpret  war  costs.  Some  of  the  statistical  tables 
will  serve,  nevertheless,  as  valuable  illustrations  of  part  of 
the  discussion  which  is  found  in  the  preceding  chapter. 

Citizens  not  only  have  a  right  to  know,  but  should 
know,  the  magnitude  of  this  burden  which  has  been  in- 
voluntarily thrust  upon  them.  This  is  the  more  impor- 
tant, too,  in  these  days,  when  the  demands  upon  the 
functions  of  the  state  have  become  so  extended  as  to  make 
the  securing  of  funds  for  ordinary  expenditures  a  real 
problem.  Many  citizens,  moreover,  may  now  or  in  the 
future  be  in  positions  of  political  power  and  influence, 
and  by  having  an  adequate  understanding  of  the  conse- 
quences of  war,  they  should  hesitate  to  thrust  a  country 
into  a  state  of  hostilities  without  the  maturist  deliberation. 

Money  Costs. — The  first  significant  factor  that  appears 
in  the  mention  of  the  cost  of  war  is  that  large  sums  of 


THE  COST  OF  WAR  485 

money  are  demanded  and  expended.  It  has  already  been 
noted  that  this  aspect  is  but  superficial,  for  in  reality  the 
actual  money  is  of  no  service  except  as  it  will  command 
ships,  artillery,  munitions,  and  supplies.  A  period  of  war, 
in  fact,  is  almost  without  exception  marked  by  a  per- 
ceptible increase  in  the  circulating  medium.  If  the  direct 
money  expenditures  were  the  only  cost  of  war,  the  calcu- 
lation would  be  comparatively  easy  and  the  burden  would 
be  materially  lessened.  War  costs  do  not  begin,  however, 
with  the  opening  of  hostilities,  nor  do  they  cease  with 
treaties  of  peace.  The  expense  of  maintaining  the  mili- 
tary machine  in  Germany  was  an  enormous  burden,  while 
the  maintenance  of  armies  and  navies  in  countries  which 
were  considered  as  unprepared  for  war,  has  formed  no 
little  proportion  of  their  entire  expenditures. 

Other  Costs. — The  direct  money  expenditures  for  war, 
its  preparation  and  aftermath,  are  not  the  only  conse- 
quences to  which  a  fiscal  importance  can  be  attached. 
The  need  for  safeguarding  the  patrimony  of  the  state  has 
already  been  emphasized,  and  the  possible  effects  of  war 
upon  the  potential  sources  of  revenue  cannot  be  over- 
emphasized. The  decrease  in  productive  capacity  which 
arises  from  the  destruction  of  capital  and  man  power  is 
an  item  which  at  once  presents  itself.  The  diversion  of 
industry  from  productive  enterprises  to  those  of  produc- 
ing for  destruction;  the  disarrangement  of  trade  and 
commerce;  the  decreased  productive  capacity  of  those 
left  physically  and  morally  deficient;  the  destruction  of 
the  virile  manhood  which  leaves  a  larger  proportion  of 
the  weaklings  to  propagate  the  race;  the  sums  which 
must  be  expended  to  take  care  of  those  left  dependent  or 
partially  dependent — these  all  must  be  considered  in  the 
invisible  and  visible  costs  of  war.  Because  of  these  re- 
sults, the  state  is  handicapped  in  raising  funds  for  prose- 
cuting the  many  progressive  enterprises  which  are  con- 
tinually calling  for  its  support. 

Returns  from  War. — To  endure  such  costs  as  indicated 


486  OUTLINES  OF  PUBLIC  FINANCE 

above,  the  returns  from  war  should  be  great.  These  re- 
turns are  often  exaggerated.  The  claim  of  the  militarists 
has  been  that  war  makes  for  strength  and  manhood,  and 
unless  military  training  be  given,  the  male  population 
would  degenerate  into  weaklings.  The  fallacy  of  such 
reasoning  was  clearly  demonstrated  when  the  strength 
and  vitality  of  the  peace-bred  American  soldier  was  pitted 
against  the  one  of  militaristic  breeding  on  the  Western 
front.  War  does,  no  doubt,  stimulate  progress,  but  it  is 
impossible  to  measure  the  amount  of  progress  which  has 
been  dependent  upon  war.  Necessity  is  the  mother  of 
invention  in  time  of  war,  if  at  any  time,  and  may  bring 
rapid  advancement  in  scientific  progress.  The  develop- 
ment of  the  air  craft,  for  example,  received  a  remarkable 
stimulus  from  the  Great  War,  and  it  is  impossible  even 
to  estimate  how  many  years  of  peace  it  would  have  taken 
to  have  arrived  at  the  same  place.  While  some  such  bene- 
fits may  come,  they  sink  into  insignificance  when  com- 
pared with  the  cost. 

An  attempt  will  be  made  to  show  briefly  some  of  the 
costs  which  have  been  found  to  accompany  war,  with  the 
general  effects  upon  the  citizenship.  The  figures  which 
will  be  found  may  be  far  from  accurate,  but  they  form  a 
valuable  basis  of  comparison. 

241.  The  United  States  Was  Not  Free  from  War  Costs 
During  Its  Early  History. — Few  citizens,  before  the  ad- 
vent of  the  Great  War,  have  stopped  to  consider  that  the 
direct  or  indirect  expenditures  for  war  have  placed  a 
larger  burden,  in  the  form  of  Federal  expenditures,  upon 
the  people  of  the  United  States,  than  the  burden  has  been 
for  all  other  expenditures.  A  moment's  reflection  upon 
this  statement  cannot  but  impress  upon  the  reader  the 
cost  of  war,  of  its  preparation  and  consequences,  even  in 
a  country  that  has  enjoyed  as  many  years  of  peace  as  has 
the  United  States. 

Cost  of  Early  Wars.— The  War  of  1812  was,  of  course, 
the  first  actual  experience  with  warfare  which  can  be 


THE  COST  OF  WAR 


487 


attributed  to  the  United  States.  That  does  not  mean 
that  the  early  citizens  were  free  from  the  burden  of  war, 
for  fiscal  reminders  of  the  Revolution  were  ever  present. 
Expensive  Indian  wars  also  occurred.  The  attempt  will 
be  made,  so  far  as  possible,  to  refrain  from  the  use  of 
burdensome  statistics,  yet  there  is  no  better  way  to  show 
the  weight  of  war  costs  during  the  first  years  of  our  gov- 
ernment than  to  give  a  table  of  comparative  expenditures 
for  some  of  the  early  years.  To  arrive  at  war  burdens 
the  first  three  columns  must  be  offset  against  the  fourth, 
or  compared  with  the  total.  Even  this  does  not  quite 
tell  the  story,  for  under  the  miscellaneous  expenditures  is 
included  the  amount  which  was  expended  for  pensions  as 
well  as  the  civil  expenditures. 

EXPENDITURES  OF  THE  UNITED  STATES1 


Year 

War 

,' 

Navy 

Interest 
on 
Debt 

Miscellane- 
ous 

Total 

1791 

$    633,000 

$1,178,000 

SI,  286  000 

$  3  097  000 

1794  

1797  
1800  
1802     .  . 

2,639,000 
1,039,000 
2,561,000 
1,179,000 

$    61,000 
382,000 
3,448,000 
915,000 

2,752,000 
3,172,000 
3,402,000 
4,239,000 

844,000 
1,414,000 
1,401,000 
1  642000 

6,297,000 
6,008,000 
10,813,000 
7  976000 

1804  

875,000 

1,189,000 

4,185,000 

2,287  000 

8637000 

1806 

1  224  000 

1  649  000 

3368000 

3  206  000 

9  449000 

1808  
1810   .    .. 

2,900,000 
2,294,000 

1,884,000 
1,654,000 

2,557,000 
3,163  000 

1,719,000 
1  362000 

9,061,000 
8474000 

1811  

2,032,000 

1,965,000 

2,585,000 

1,594,000 

8,178,000 

War  of  1812— -The  advent  of  the  War  of  1812  very 
largely  increased  the  visible  war  costs.  The  above  table 
extended  through  the  War  of  1812  is  as  follows: 


Year 

War 

Navy 

Interest 
on 
Debt 

Miscellane- 
ous 

Total 

1812..  . 

$11  817000 

$3  959  000 

$2  451  000 

$2  052  000 

$20  280  000 

1813  
1814  
1815  

19,652,000 
20,350,000 
14,794,000 

6,446,000 
7,311,000 
8,660,000 

3,599,000 
4,593,000 
5,990,000 

1,983,000 
2,465,000 
3,499,000 

31,681,000 
34,720,000 
32,943,000 

lThe  statistics  for  these  early  expenditures  are  taken  from  Dewey, 
Firunicial  History  of  the  United  States.  The  figures  under  "War"  and 
"Navy"  are  for  these  respective  departments, 


488 


OUTLINES  OF  PUBLIC  FINANCE 


The  immense  increase  in  expenditures  which  a  war  en- 
tails is  clearly  illustrated  from  this  table,  even  though 
the  percentage  of  expenditure  for  the  weapons  of  war  in 
times  of  peace  may  be  large.  In  the  above  tables  it  its 
seen  that  in  1811,  the  last  year  before  open  hostilities,  the 
war  costs  were  over  95  per  cent  of  the  entire  expenditures. 
The  burdens,  however,  did  not  cease  with  the  signing  of 
the  treaty,  but  the  outlays  for  war  machines,  the  payment 
of  interest  and  pensions,  continued. 

Peace  Expenditures. — The  following  table,  in  which 
years  are  chosen  rather  at  random  from  our  history  fol- 
lowing the  War  of  1812,  portrays  to  what  extent  the  bur- 
den of  war  continued  to  fasten  its  tenons  upon  the  citi- 
zenship of  the  country: 

EXPENDITURES  OP  THE  UNITED  STATES  FOR  YEARS  FOLLOWING  181 2 l 


Year 

War 

Navy 

Pensions 

Interest 
on 
Debt 

Miscellane- 
ous 

Total 

1816... 

$16,012,000 

$3,908,000 

$  189,000 

$7,823,000 

$3,264,000 

$31,196,000 

1819... 

6,506,000 

3,847,000 

2,415,000 

5,211,000 

3,530,000 

21,511,000 

1825... 

3,659,000 

3,049,000 

1,308,000 

4,366,000 

3,472,000 

15,856,000 

1830... 

4,767,000 

3,239,000 

1,363,000 

1,912,000 

3,859,000 

15,141,000 

1835... 

5,759,000 

3,864,000 

1,954,000 

57,000 

5,935,000 

17,537,000 

1840... 

7,095,000 

6,113,000 

2,603,000 

174,000 

8,326,000 

24,314,000 

1845... 

5,746,000 

6,297,000 

2,400,000 

1,040,000 

7,450,000 

22,954,000 

1846... 

10,413,000 

6,455,000 

1,811,000 

842,000 

7,738,000 

27,261,000 

1847... 

35,840,000 

7,900,000 

1,744,000 

1,119,000 

8,315,000 

54,920,000 

1848... 

27,688,000 

9,408,000 

1,227,000 

2,390,000 

6,902,000 

47,618,000 

1849... 

14,558,000 

9,786,000 

1,328,000 

3,565,000 

14,259,000 

43,499,000 

1850... 

9,687,000 

7,904,000 

1,866,000 

3,792,000 

17,706,000 

40,948,000 

1855... 

14,648,000 

13,327,000 

1,477,000 

2,314,000 

26,832,000 

58,630,000 

1856... 

16,963,000 

14,074,000 

1,296,000 

1,953,000 

34,438,000 

68,726,000 

1857... 

19,159,000 

12,651,000 

1,310,000 

1,593,000 

32,919,000 

67,634,000 

1858... 

25,679,000 

14,053,000 

1,219,000 

1,652,000 

31,378,000 

73,982,000 

1859... 

23,154,000 

14,690,000 

1,222,000 

2,637,000 

27,287,000 

68,993,000 

1860... 

16,472,000 

11,514,000 

1,100,000 

3,114,000 

30,968,000 

63,201,000 

1  The  expenditures  listed  under  "War"  include  some  items,  such  as  ap- 
propriations for  rivers  and  harbors,  which  are  not  strictly  war  costs.  This 
would  somewhat  lower  the  percentage  of  war  costs,  yet  the  amount  found 
in  these  items  is  usually  comparatively  small  and  would  not  change  the 
ratio  to  any  great  extent, 


THE  COST  OF  WAR  489 

The  figures  in  the  above  table  cover  a  period  in  our 
history  when  war  and  its  fiscal  influences  are  most  likely 
to  be  forgotten.  There  has  not  been  a  year,  however, 
when  its  presence  has  not  been  felt  in  the  sums  which 
have  been  contributed  to  the  government.  While  some 
fluctuations  occur  in  the  expenditures  of  the  War  and 
Navy  Departments,  the  general  trend  of  their  expenditure 
has  been  upward.  The  item  for  pensions  has  been  an 
ever-present  one,  as  has  also  the  interest  charge.  A  part 
of  the  interest  charge  has  arisen  from  other  causes  than 
war  and  the  preparation  for  war,  yet  these  factors  have 
been  so  largely  responsible  for  creating  public  debts  that 
it  would  not  be  far  wrong  to  consider  the  interest  charge 
as  a  war  cost.  Borrowing  iisually  would  be  found  unnec- 
essary if  the  army  and  navy  expenditures  did  not  exist. 
For  two  or  three  years  in  the  early  '  thirties  no  interest 
charge  occurred.  This  table,  again,  illustrates  the  visible 
increase  of  expenditure  during  the  actual  progress  of  war. 
The  years  during  the  Mexican  War  show  the  increases  in 
the  costs  of  the  War  Department,  while  the  few  succeed- 
ing years  reflect  its  effect  on  the  interest  charge.  It  is 
interesting  to  note  that,  in  the  year  during  the  period 
covered  by  the  table,  when  the  proportion  of  expenditure 
for  pensions  and  the  departments  of  War  and  Navy  were 
lowest,  it  represented  about  60  per  cent  of  the  total 
outlay. 

242.  The  Civil  War  Augmented  Our  War  Burden. — It 
has  been  seen  that,  through  our  years  of  peaceful  develop- 
ment, the  outlay  for  the  instruments  of  war  gradually 
increased.  When  the  Civil  War  was  precipitated  upon 
the  nation,  however,  the  costs  leaped  to  sums  which  would 
have  been  looked  upon  as  impossible  a  few  years  before. 
The  expenditures  for  the  war  are  given  in  the  following 
table.  Pensions,  an  item  of  comparatively  small  impor- 
tance at  this  time,  are  included  in  the  miscellaneous 
item. 


490 


OUTLINES  OF  PUBLIC  FINANCE 


EXPENDITURES  DURING  THE  CIVIL  WAR 


Year 

1861... 
1862... 
1863... 
1864... 
1865... 

War 

Navy 

Miscellane- 
ous 

Interest 
on 
Debt 

Total 

$    23,001,000 
389,173,000 
603,314,000 
690,391,000 
1,030,690,000 

$12,387,000 
42,640,000 
63,261,000 
85,705,000 
122,617,000 

$27,226,000 
24,564,000 
27,428,000 
35,186,000 
64,395,000 

$    842,000 
13,190,000 
24,729,000 
53,685,000 
77,395,000 

$    66,650,000 
469,569,000 
718,733,000 
864,968,000 
1,295,099,000 

No  comment  is  necessary  upon  these  figures.  The 
enormity  of  the  burden  as  the  war  proceeded,  when  com- 
pared with  that  borne  at  the  beginning,  is  evident.  Yet 
the  fiscal  burden  as  represented  by  the  expenditures  of 
the  Federal  government  is  not  the  only  one  to  be  con- 
sidered. The  increased  burdens  which  were  imposed  by 
the  minor  political  divisions  must  be  added.  Increased 
fiscal  burdens  had  to  be  borne,  moreover,  because  of  the 
effects  of  currency  inflation.  The  issue  of  greenbacks 
furnishes  an  excellent  example  of  the  added  sacrifice  a 
state  may  impose  upon  its  subjects.  That  the  issue  of  the 
fiat  money  actually  increased  the  fiscal  burdens  is  evident 
when  consideration  is  given  to  the  fact  that  the  govern- 
ment was  a  purchaser  in  the  market  at  the  prevailing 
prices.  The  rapid  advance  in  prices  due  to  greenback 
inflation  caused  an  increase  in  Federal  expenditure  which 
has  been  estimated  at  from  $500,000,000  to  $900,000,000. 

The  inflated  prices,  moreover,  imposed  a  direct  burden 
upon  the  citizenship.  Between  1860  and  1865  prices  in- 
creased something  like  115  per  cent,  while  wages  were 
increased  less  than  50  per  cent.  Many  other  incomes 
were  fixed,  so  that  real  hardship  was  felt  because  of  the 
falling  off  in  purchasing  power.  Labor  disturbances  re- 
sulted, the  effects  of  which  upon  industry  cannot  be  over- 
looked. The  payment  of  standing  indebtedness  in  the 
depreciated  currency  imposed  a  burden  upon  the  creditor 
class  which  was  not  insignificant.  It  need  not  be  said 
that  the  burden  caused  by  the  loss  of  life,  the  derange- 
ment of  industry,  and  the  destruction  of  goods  was  also 


THE  COST  OF  WAR 


491 


great.  While  most  of  these  aspects  cannot  be  measured  in 
terms  of  money,  yet  the  sacrifices  which  they  caused  were  no 
less  real  than  if  a  money  measure  could  be  assigned  to  each. 

Post-war  Costs. — The  cost  of  the  Civil  War  has  not  yet 
been  paid.  This  is  evident  to  everyone  who  has  heard  an 
"old  soldier "  speak  of  his  pension,  or  who  has  seen  or 
visited  a  soldiers'  home.  While  the  immediate  direct 
costs  were  enormous,  the  costs  for  decades  following,  in 
the  form  of  interest  and  pensions,  which  can  be  directly 
attributed  to  this  war,  have  not  been  inconsiderable. 
The  maintenance  and  enlargement  of  the  army  and  navy, 
and  the  building  of  fortifications  and  defenses  continued, 
so  that  war  has  not  ceased  to  claim  the  lion's  share  of  the 
expenditures  of  the  Federal  government. 

While  no  proof  is  needed  to  convince  the  student  that 
the  costs  of  a  war  as  long  ago  as  the  Civil  War  are  still 
with  us,  yet  a  few  figures  will  illustrate  the  part  that  the 
demands  of  war  have  made  upon  our  treasury.  It  will  be 
unnecessary  to  enter  into  such  detail  as  in  the  preceding 
period,  because  it  has  already  been  established  that  the 
burden  of  war  is  a  continuous  one.  Professor  Bullock  has 
made  some  calculations  which  will  serve  our  purposes  as 
well  as  any  others  which  might  be  given.1  These  figures 
more  accurately  portray  the  war  costs  than  those  given 
above,  because  the  river  and  harbor  expenditures  have  been 
deducted  from  the  expenditures  of  the  War  Department. 

WAR  EXPENDITURES  OF  THE  UNITED  STATES 


Year 

1870 
1880 
1890 
1897 
1900 
1902 

Army 
and 

Navy 

Pensions 

Interest 

Total 
for  War 

Total 
Expenditures 

Per 
Cent 
for 
War 

$79,435,000 
43,640,000 
54,851,000 
69,829,000 
172,009,000 
165,128,000 

$28,340,000 
56,777,000 
106,936,000 
141,053,000 
140,877,000 
138,488,000 

$129,235,000 
95,757,000 
36,099,000 
37,791,000 
40,160,000 
29,108,000 

$237,010,000 
196,174,000 
197,886,000 
248,673,000 
353,046,000 
332,724,000 

$293,565,000 
264,847,000 
297,736,000 
365,774,000 
487,713,000 
471,190,000 

80.7 
74.0 
66.4 
68.0 
72.4 
70.6 

1  "The  Growth  of  Federal  Expenditures,"  in  Political  Science  Quarterly, 
vol  xyiii,  p,  97, 


492 


OUTLINES  OF  PUBLIC  FINANCE 


Per  Capita  Cost. — The  total  costs,  however,  are  only 
one  aspect  of  the  situation.  It  is  of  much  concern  whether 
a  burden  can  be  divided  among  many,  or  whether  it  must 
be  borne  by  comparatively  few.  It  might  be  true  that  a 
continually  increasing  expenditure  for  war  would  entail  a 
smaller  individual  burden  if  the  population  were  increas- 
ing more  rapidly  than  the  increase  in  expenditure.  The 
following  table  will  illustrate  the  relation  the  per  capita 
expenditures  for  civil  and  military  affairs  have  borne  to 
each  other  at  various  tunes  in  our  history,  as  well  as  the 
increase  in  the  per  capita  burden.  The  table  clearly  por- 
trays how  exceptionally  low  the  civil  expenditures  have 
been  in  comparison  with  the  others.  Even  these  figures 
do  not  show  the  annual  exactions  which  have  been  made, 
because  the  sums  which  had  to  be  raised  to  cancel  war  in- 
debtedness, both  at  home  and  abroad,  have  not  been 
included  in  the  figures. 

PER  CAPITA  EXPENDITURES  OF  THE  UNITED  STATES 


Year 

Civil 

All 
Purposes 

Year 

Civil 

All 
Purposes 

1800 

$0  25 

$2  04 

1860 

$0  98 

$2  01 

1810 

0  18 

17 

1870 

1  19 

6  80 

1820  

0  30 

90 

1880.  .  .      . 

1  36 

5  28 

1830  

0  30 

18 

1890  

1.59 

4  75 

1840  

0.48 

.42 

1900  

1.76 

6.39 

1350 

0  76 

76 

1902 

1  75 

5  96 

It  is  evident  from  these  figures  that  the  business  of  war 
and  the  maintenance  of  the  machinery  for  war  have  been 
the  one  overwhelming  item  of  expense  to  the  Federal 
government.  This  becomes  all  the  more  significant,  too, 
when  it  is  remembered  that  our  country  has  not  been 
considered  militaristic  to  any  appreciable  extent.  The 
negative  burden  appears  when  one  stops  to  consider  what 
might  have  been  done  in  a  positive  and  constructive  way 
with  the  funds  which  have  been  thus  expended. 

No  attempt  will  be  made  to  show  the  past  burden  of 
war  to  other  countries,  although  more  startling  figures 
would  appear,  in  many  cases,  than  are  those  for  the 


THE  COST  OF  WAR  493 

United  States.  It  would  be  superfluous,  moreover,  to 
compile  figures  for  the  United  States  for  the  first  years  of 
the  present  century.  The  results  would  simply  show  an 
increasing  proportion  of  expenditures  for  army  and  navy. 
A  great  amount  of  interest  will  be  found,  however,  in 
noticing  some  of  the  burdens,  directly  or  indirectly  attrib- 
utable to  the  recent  conflict,  which  have  been  placed  upon 
the  principal  nations  of  the  world. 

243.  The  Cost  of  the  Great  War  Eclipsed  Any  Previous 
War  Expenditures. — A  number  of  insurmountable  diffi- 
culties are  at  once  encountered  when  an  attempt  is  made 
to  arrive  at  the  costs  of  a  war  so  recent  and  of  such  magni- 
tude as  the  Great  War.  A  large  number  of  the  war  ex- 
penses continue  to  exist,  and,  as  indicated  in  the  above 
discussion,  will  continue  to  exist  for  generations  to  come. 
But  many  of  the  more  immediate  costs  are  not  yet  paid 
and  should  still  be  considered.  Demobilization  has  not 
been  completed,  armies  have  not  ceased  to  police  the  con- 
quered territory,  men  are  still  in  the  hospitals  or  in  voca- 
tional training — all  these  entail  an  expense  which  might 
be  said  to  arise  from  the  more  immediate  aftermath  of 
the  war,  and  should  in  reality  be  counted  as  a  part  of  the 
cost  of  the  war  period. 

The  actual  expenditure  during  the  war  period  is  greater 
than  should  be  attributed  to  war  costs,  because  states 
would  be  making  expenditures  even  if  the  war  did  not 
exist.  A  part  of  the  expenditures,  as  for  food  and  cloth- 
ing, and  for  the  shelter  of  the  soldiers,  are  but  substituted 
for  those  which  would  otherwise  be  made  by  individuals. 
To  arrive  at  an  approximate  war  cost,  consequently,  the 
amount  of  the  expenditures  for  civil  purposes  should  be 
estimated  and  deducted  from  the  aggregate  expenditures. 
The  value  of  devastated  land  areas  and  of  destroyed 
capital  can  only  be  estimated,  and  from  this  should  be 
deducted  the  value  of  permanent  additions  to  capital, 
such  as  merchant  marine,  railroad  equipment,  and  the 
added  stimulus  to  invention,  as  in  the  perfection  of  the 


494  OUTLINES  OF  PUBLIC  FINANCE 

air  craft.  The  rapid  depreciation  in  the  value  of  the 
various  monetary  units  must  also  be  considered. 

Because  of  all  these  problems,  any  figures  which  have 
been  computed  are  at  best  only  approximations.  Our 
concern,  however,  is  not  to  deal  with  actualities,  but  to 
attempt  to  convey,  in  some  measure,  the  magnitude  of 
the  burden,  and  the  total  figures  are  so  great  that  a  few 
million  dollars  either  way  would  make  little  difference. 

Since  the  signing  of  the  armistice,  November  11,  1918, 
a  number  of  writers  have  attempted  to  calculate  the  cost 
of  the  war.1  The  figures  deal  most  extensively  with  taxes 
and  borrowings,  while  in  some  cases  attempts  have  been 
made  to  estimate  the  burden  of  the  indirect  costs,  such  as 
loss  of  life,  property,  etc.  The  aggregate  figures  of  the 
direct  money  costs  are  so  appalling  as  to  have  no  real 
meaning.  The  estimates  which  have  been  made  range 
from  a  little  more  than  $210,000,000,000  to  about  $240,- 
000,000,000.  Because  of  the  incomprehensibleness  of  these 
figures  some  detailed  analysis  must  be  undertaken  hi 
order  to  appreciate  their  significance. 

Daily  Costs. — The  effect  of  the  war  upon  the  indebted- 
ness of  the  principal  belligerents  was  discussed  in  the 
chapter  on  Public  Indebtedness.  Reference  should  be 
made  to  this  in  seeking  to  estimate  the  burden  which  the 
debts  have  placed  upon  present  and  future  generations 
through  the  mortgaging  of  the  social  income.2  Some  idea 
of  the  cost  of  the  war  while  it  was  in  progress  may  be 
gained  by  a  summary  of  the  daily  expenditures  of  the 

1  The  best  treatments  on  the  cost  of  the  war  to  date  (1921)  are  Direct 
and  Indirect  Costs  of  the  Great  World  War,  by  E.  L.  Bogart,  published  by 
the  Carnegie  Endowment  for  International  Peace;  "The  Cost  of  the  War, 
and  How  It  Was  Met,"  by  Edwin  R.  A.  Seligman,  in  The  American  Eco- 
nomic Review,  vol.  ix,  No.  4;  and  "Debts,  Revenues,  and  Expenditures, 
and  Note  Circulation  of  the  Principal  Belligerents,"  by  Louis  Ross  Gott- 
lieb, in  The  Quarterly  Journal  of  Economics,  vol.  xxxiv,  No.  1.  The  author 
wishes  to  acknowledge  his  indebtedness  to  these  publications  for  many 
of  the  figures  herewith  presented.  Some  of  the  tables  are  given  exactly  as 
presented  by  these  authors,  while  others  are  modified  to  more  nearly  suit 
the  purpose  in  hand.  2  See  Chapter  XVI,  p.  409. 


THE  COST  OF  WAR 


495 


principal  nations.  The  daily  expenditures  of  the  pre-war 
year  have  been  deducted  from  the  total  daily  expenditures. 
The  table  not  only  shows  the  actual  expenditures,  but 
shows  the  growth  as  the  war  progressed.  The  dates  given 
are  approximate,  and  the  data  are  gathered  from  a  table 
given  by  Professor  Seligman.  It  is  interesting  to  note 
that  in  the  beginning  the  daily  expenditures  of  Germany 
exceeded  those  of  the  other  countries. 

AVERAGE  DAILY  EXPENDITURES  IN  MILLIONS  OP  DOLLARS 


Date 

Great 
Britain 

France 

Italy 

Austria 

Germany 

1914-15 

$    9  46 

$  8  5 

$  4  4 

$  6.4 

$13  3 

1915-16  

18.16 

12.2 

7.5 

8.7 

15  9 

1916-17  

26.69 

17.6 

10.4 

10.4 

22  7 

1917-18  

33.36 

32.4 

6.5 

12.3 

31.0 

A  glance  at  this  table  dispels  the  notion  that  the  nations 
were  financially  exhausted.-  In  every  case  except  Italy 
there  was  a  continuous  and  rapid  increase  in  the  amount 
of  money  which  was  spent  daily.  As  large  as  these  sums 
appear,  they  were  eclipsed  by  the  expenditures  of  the 
United  States  after  her  entry  into  the  war.  A  more  de- 
tailed analysis  of  these  sums  will  be  of  interest  to  American 
students.  The  figures  represent  the  actual  war  expendi- 
tures, and  are  also  from  a  table  given  by  Professor  Seligman. 

WAR  EXPENDITURE  OP  THE  UNITED  STATES  IN  MILLIONS 


19 

17 

19 

18 

19 

19 

Month 

Total 

Average 
Daily 

Total 

Average 
Daily 

Total 

Average 
Daily 

January 

$1,030 

$33.2 

$1,902 

$61.4 

February  

952 

34.0 

1,129 

40.0 

March 

1,096 

35.9 

1,319 

42.5 

April  

$    219 

$  8.0 

1,155 

38.5 

1,369 

45.6 

May  

467 

15.0 

1,448 

46.7 

1,052 

33.9 

June 

350 

11  7 

1,452 

48.4 

749 

24.9 

July 

602 

19.4 

1,548 

49.9 

August  

697 

22.5 

1,745 

46.8 

September  
October  

686 

884 

22.9 
29.5 

1,497 
1,605 

49.9 
51.8 





November  
December  

926 
1,045 

30.9 
33.7 

1,875 
2,001 

62.5 
64.5 

.... 



32 


496  OUTLINES  OF  PUBLIC  FINANCE 

The  reader  will  be  able  to  find  many  interesting  com- 
parisons from  this  table  and  the  preceding  one.  The 
rapid  increase  in  the  expenditures  and  the  enormity  which 
they  reached  is  almost  startling.  The  highest  daily  ex- 
penditure of  Great  Britain  was  about  $33,000,000,  while 
that  of  the  United  States  was  nearly  double  that  sum. 
Another  interesting  feature  is  that  the  greatest  expendi- 
ture came  after  the  armistice  was  signed,  and  that  it  was 
still  large  months  thereafter. 

Source  of  Revenue. — The  item  of  interest  which  next 
commands  attention  is  what  was  the  source  to  which  the 
administrators  of  these  various  countries  could  contin- 
ually turn  and  always  find  a  supply  of  funds  ready  to  be 
used?  The  two  sources  upon  which  greatest  reliance  was 
placed  were,  of  course,  loans  and  taxes.  In  the  light  of 
the  discussion  of  these  methods  as  factors  in  war  finance 
in  the  preceding  chapter,  a  comparison  of  the  amounts 
secured  from  each  source  by  the  principal  nations  will  be 
interesting.  The  following  table  presents  these  facts  in 
tabulated  form,  and  also  shows  the  extent  to  which  each 
country  relied  upon  taxes.  The  total  receipts  and  dis- 
bursements of  the  United  States  for  the  war  years,  and 
for  preceding  years,  as  well  as  some  ratios,  are  given  hi 
another  table.1 

These  tables  present  a  number  of  interesting  aspects. 
The  United  States  and  England,  it  will  be  noticed,  raised 
a  much  larger  percentage  of  their  revenue  from  taxes 
than  did  the  other  countries,  in  that  from  25  to  30  per  cent 
came  from  taxes.  The  others  were  much  lower.  The  fact 
is  clearly  demonstrated  that,  in  spite  of  the  great  increase 
in  taxes,  the  majority  of  the  revenues  came  from  loans. 
Then,  too,  it  is  interesting  to  notice  the  comparative  use 
that  was  made  of  direct  and  indirect  taxes.  In  the  table 
of  revenues  and  expenditures  for  the  United  States,  the 
growing  importance  of  the  direct  system  for  securing 

1  These  two  tables  are  taken,  somewhat  modified,  from  Gottlieb.  See 
note,  p.  494. 


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498  OUTLINES  OF  PUBLIC  FINANCE 

revenue  is  illustrated.  The  change  from  a  less  than  10 
per  cent  to  over  65  per  cent  reliance  upon  this  form 
goes  to  establish  its  efficacy. 

A  similar  study  of  the  use  of  direct  and  indirect  taxes 
hi  the  other  countries  will  reveal  a  wide  variation  in  the 
extent  to  which  each  was  used.  In  England  the  percent- 
age of  direct  taxes  rose  to  nearly  75.  In  Italy  slightly 
more  reliance  was  placed  upon  direct  taxes  than  before 
the  war,  but  their  use  was  not  extended.  France  is  the 
exception,  for  the  percentage  of  the  revenue  which  was 
raised  from  direct  taxes  continued  to  fall  until  it  reached 
about  25  per  cent,  when  it  began  to  rise  again.  In  Ger- 
many the  habit  of  the  government  had  been  to  rely 
mainly  upon  indirect  taxes.  This  policy  was  followed 
rather  closely  until  near  the  end  of  the  war,  when  some 
direct  taxes  were  used.  In  studying  the  relative  merits  of 
these  two  forms  as  suitable  for  emergency  financiering,  much 
consideration  should  be  given  to  the  incidence  of  the  tax,  so 
that  one  class  of  citizens  would  not  be  unduly  burdened. 

244.  The  Expansion  of  Money  and  Credit  Greatly  Af- 
fected the  War  Cost. — During  the  Great  War,  owing  to 
the  advanced  systems  of  banking  found  in  most  countries, 
the  issue  of  fiat  money  was  used  much  less  extensively 
than  during  our  Civil  War.  Much  the  same  results  were 
effected,  however,  by  the  rapid  expansion  of  bank  notes, 
and  these  results  were,  of  course,  magnified  in  the  coun- 
tries where  specie  payments  were  stopped.  The  rapid  in-, 
crease  in  prices,  in  the  terms  of  which  the  governments 
had  to  buy  goods,  made  the  money  expenditures  appear 
much  greater,  as  the  war  progressed,  than  was  the  actual 
consumption  of  goods.  It  has  been  estimated  that  the 
value  of  goods  demanded  by  the  war  at  the  pre-war  price 
level  would  be  about  one  half  of  the  total  monetary  out- 
lay. Since  such  a  large  part  of  the  finances  came  from 
loans,  however,  which  must  be  paid  from  taxes  during  a 
presumably  lower  price  level,  the  demand  upon  goods  will 
be  greater  than  the  figures  represent  at  present. 


THE  COST  OF  WAR 


499 


Expansion  in  Different  Countries. — A  comparison  of  the 
amount  of  notes  in  circulation  in  the  various  nations  just 
before  the  war  and  about  the  middle  of  1919  shows  the 
increase  to  be  about  twentyfold.  With  this  must  be 
considered,  also,  the  state  of  industry,  in  which  production 
fell  off  so  that  there  were  fewer  goods  to  be  exchanged  for 
the  money.  Russia  took  the  lead  in  the  amount  of  per 
capita  note  expansion,  which  was  carried  to  such  a  degree 
as  to  make  the  gold  reserve  practicably  negligible.  France 
came  second  hi  the  amount  of  per  capita  inflation,  yet  her 
reserve  was  maintained  to  a  much  better  degree  than  that 
of  either  Austria-Hungary  or  Turkey,  where  inflation  was 
not  so  marked.  In  the  total  circulation  of  notes,  Russia 
increased  her  amount  about  forty-five  times;  Germany 
and  Austria-Hungary  about  eighteen  times;  Great  Brit- 
ain a  little  less  than  ten  times;  while  the  increase  in  the 
United  States,  Italy,  and  France  was  about  four  times. 
The  following  table  will  portray  at  a  glance  the  changes 
in  the  note  circulation  during  the  war  period,  for  the  im- 
portant countries.  In  addition  to  the  increase  hi  note 
issues,  some  of  the  countries  made  large  issues  of  treasury 
notes,  as  in  England,  for  example,  which  of  course  in- 
creased the  inflation. 

NOTE  CIRCULATION  OF  BELLIGERENT  COUNTRIES  IN  MILLIONS  OP  DOLLARS  1 
A.     Allied  Countries 


Country 

BEFORE  THE  WAR 

AFTER  THEYWAR 

Date 

Total 
Amount 

Per 

Capita 

Date 

Total 
Amount 

Per 

Capita 

United  States.  . 
Great  Britain  .  . 
France  
Italy 

July     1,  '14 
July   29,  '14 
July   30,  '14 
July  31,  '14 
Aug.     1,  '14 
Aug.     1,  '14 
Mar.  19,  '14 
July    31,  14 

$    715 
223 
1,290 
518 
163 
842 
186 
46 

$6.70 
4.84 

32.49 
14.11 
2.81 
4.62 
24.29 
9.29 

Aug.      1,  '19 
Aug.    6,  '19 
Aug.    7,  '19 
May  20,  '19 
June  28,  '19 
Aug.  31,  '19 
July  24,  '19 
June  23,  '19 

$  3,340 
2,331 
6,805 
2,695 
582 
38,474 
882 
257 

$55,366 

$  31.32 
50.58 
171.41 
73.40 
10.03 
211.18 
115.17 
31.92 

$114.88 

Japan  

Russia  

Belgium    . 

Greece  

Total  

$3,983 

$8.26 

1  This  table  is  taken,  somewhat  modified,  from  Gottlieb.    See  note,  p.  494. 


500  OUTLINES  OF  PUBLIC  FINANCE 

B.    Central  Powers 


Country 

BEFORE  THE  WAR 

AFTER  THE  WAR. 

Date 

Total 
Amount 

Per 
Capita 

Date 

Total 
Amount 

Per 

Capita 

Germany.  ,  . 

July  23,  '14 
July  23,  '14 
July     1,  '14 
Sept.         '13 

$    528 
432 
9 
36 

$7.93 

8.25 
0.42 
6.52 

July     7,  '19 
Aug.  15,  '19 
April        '19 
Mar.         '19 

$10,109 
8,400 
704 
390 

$149.07 
160.40 
33.09 
70.68 

Aus.  -Hungary  . 
Turkey 

Bulgaria 

Total 

$1,015 

$6.91 

$19,603 

$133.38 

Grand  Tot 

Ell  

$4,998 

$7.95 

$74,969 

$119.20 

Effects  of  Price  Changes. — There  is  no  question  but  that 
this  greatly  inflated  currency  was  one  of  the  principal 
causes  of  the  rapidly  rising  prices.  In  some  countries  the 
above  table  does  not  show  the  entire  increase  in  circulating 
medium.  In  the  United  States,  for  example,  the  amount 
of  gold  com  almost  doubled  between  1913  and  1919. 
While  this  did  not  actively  circulate  to  any  extent,  yet  it 
formed  the  basis  for  extending  a  much  larger  volume  of 
credit  and,  consequently,  purchasing  power. 

The  burden  which  resulted  from  this  inflation  was  re- 
flected hi  the  nation-wide  and  world-wide  expression,  "the 
high  cost  of  living. "  Various  index  numbers  have  been 
compiled  to  show  the  general  price  changes  during  the 
war  period,  and  from  the  results  it  appears  that  wholesale 
prices  in  the  United  States  were  about  100  per  cent  higher 
in  1919  than  in  1913.  In  some  of  the  other  countries  the 
increase  was  much  greater.  Some  classes  were  benefited 
by  this  situation,  especially  those  industries  whose  ex- 
penses of  production  did  not  rise  as  rapidly  as  prices. 
This  was  particularly  true  of  extractive  industries,  and  a 
large  number  of  industrial  concerns.  It  could  not  help 
being  a  benefit  to  plants  producing  for  the  government  on 
the  basis  of  cost  plus  contracts.  The  higher  the  level  of 
prices  the  greater  their  expenses,  and  the  larger  their 
percentage  of  return. 

These  gains  from  inflated  prices  were  more  than  offset 
by  the  burdens  imposed  upon  other  classes.  While  no 


THE  COST  OF  WAR  501 

accurate  index  of  general  wage  changes  has  been  compiled, 
it  is  well  known  that  wages  did  not  rise  as  rapidly  as  prices, 
and  it  is  to  these  classes,  that  must  buy  at  the  inflated 
prices,  but  with  incomes  that  have  not  risen  proportion- 
ately, that  the  high  cost  of  living  has  its  real  significance. 
The  situation  represents  an  unjust  distribution  of  the  war 
burdens — in  fact,  it  is  a  tax  upon  one  class  of  the  popula- 
tion in  favor  of  the  class  that  gains  from  rising  prices. 
Inflated  prices,  also,  may  work  a  long-run  injustice  as 
well.  The  increased  prices  have  added  to  the  costs,  and 
hence  to  the  amount  borrowed  by  the  government.  The 
loans  come  to  a  large  extent  from  those  who  have  gained 
from  the  increased  prices.  The  levy  of  taxes  in  the  future 
to  repay  the  loans  will,  without  doubt,  fall  with  an  unjust 
proportion  upon  the  classes  which  have  been  injured  by 
the  inflated  prices  during  the  war. 

245.  The  Indirect  Costs  of  the  War  Must  Not  Be  Over- 
looked.— Thus  far,  in  considering  the  effects  of  the  Great 
War,  attention  has  been  directed  almost  entirely  to  the 
money  outlays.  While  these  were  difficult  to  measure, 
yet  some  approximation  could  be  reached.  In  addition 
to  these  direct  costs,  moreover,  are  many  indirect  costs, 
which  are  no  less  burdensome  to  individual  citizens  and 
the  nation  as  a  whole.  Upon  some  of  these  costs  a  rough 
money  estimate  can  be  placed,  while  many  others  are  of 
such  an  intangible  nature  that  little  more  can  be  done  at 
arriving  at  a  measure  of  their  burden  than  to  point  them 
out. 

Loss  of  Life. — One  of  the  first  drains  upon  the  resources 
of  the  nation  which  immediately  occurs  to  everyone  was 
the  overwhelming  destruction  of  productive  energy 
through  the  loss  of  human  life.  This  has  always  been  a 
wasteful  feature  of  war,  but  the  number  of  casualties  due 
to  the  Great  War  makes  all  wars  of  the  past  appear  as 
mere  pygmy  occurrences.  It  is  too  soon  to  have  accurate 
figures,  but  the  estimates  are  near  enough  to  the  truth  for 
purposes  of  comparison.  The  casualties  of  the  more  im- 


502 


OUTLINES  OF  PUBLIC  FINANCE 


portant  wars  of  the  nineteenth  century,  together  with  the 
length  of  duration,  are  as  follows : l 

Loss  OP  LIFE  IN  NINETEENTH-CENTURY  WARS 


War 

Duration 

Dead 

Napoleonic,  1790-1815  

9,000  da 
730 
135 
40 
1,350 
210 
995 
548 
238 

ys 

2,100,000 
785,000 
3,500 
45,000 
700,000 
184,000 
9,800 
160,000 
462,000 

Crimean,  1854-56  

Prussian-Danish,  1864 

Prussian-  Austrian,  1866  

American  Civil,  1861-65  

Franco-Prussian,  1870-71  

English-Boer,  1899-1902 

Russian-  Japanese,  1904-05  
Balkan,  1912-13  

Total.. 

4,449,300 

The  significance  of  these  figures  becomes  apparent  when 
comparison  is  made  with  the  following  table.  While  not 
all  the  figures  have  been  taken  from  official  sources,  they 
are  approximately  correct: 

CASUALTIES  OF  THE  GREAT  WAR,  1914-18 


Country 

Known 
Dead 

Seriously 
Wounded 

Otherwise 
Wounded 

Prisoners 
or  Missing 

United  States 

107  284 

43000 

148,000 

4912 

Great  Britain 

807,451 

617740 

1,441,394 

64,907 

France  

1,427,800 

700,000 

2,344,000 

453,500 

Russia  

2,762,064 

1,000,000 

3,950,000 

2,500,000 

Italy  

507,160 

500,000 

462,196 

1,359,000 

Belgium     

267,000 

40000 

100,000 

10,000 

Serbia  

707,341 

322,000 

28,000 

100,000 

Rumania 

339  117 

200000 

116,000 

Greece  

15,000 

10,000 

30,000 

45,000 

Portugal 

4000 

5,000 

12,000 

200 

Japan  

300 

907 

3 

Total  

6,938  519 

3  437  740 

8,516,497 

4,653,522 

Germany  

1,611,104 

1,600,000 

2,183,143 

772,522 

Austria-Hungary 

911  000 

850  000 

2  150000 

443,000 

Turkey  .    .    . 

436,924 

107  772 

300,000 

103,731 

Bulgaria  

101,224 

300,000 

852,399 

10,825 

Total 

3  060,252 

2  857,772 

5,485,542 

1,330,078 

Grand  Total. 

9  998,771 

6  295  512 

14  002  039 

5  983,600 

1  Taken  from  Bogart. 
source. 


See  note,  p.  494.    The  next  table  is  from  the  same 


THE  COST  OF  WAR  503 

When  the  final  results  are  known  the  list  of  dead  will, 
of  course,  be  much  larger.  Many  who  are  accounted  for 
above  in  the  wounded  and  missing  columns  will  have  to 
be  reckoned  with  the  dead.  Various  estimates  have  been 
made  as  to  what  the  number  will  be  that  will  have  to  be 
transferred,  but  the  most  conservative  would  raise  the 
list  of  dead  to  nearly  13,000,000  men.  The  task  of  placing 
an  economic  value  upon  this  loss  of  life  is,  of  course,  diffi- 
cult. The  economic  worth  of  men  is  different,  and  varies 
for  different  countries.  Various  authorities  have  attempted 
to  place  an  estimate  upon  the  value  of  human  lives,  yet 
these  estimates  have  ranged  anywhere  from  $1,000  to 
more  than  $6,000.  In  his  estimation  of  the  value  of  lives 
lost,  Professor  Bogart  chose  estimates  which  varied  for 
the  different  countries,  and  assumed  that  one  half  the 
wounded  would  be  incapacitated.  On  the  basis  of  this 
calculation  the  value  of  human  life  given  up  in  the  war 
was  more  than  $33,551,000,000.  While  this  is  necessarily 
more  or  less  arbitrary,  that  it  at  least  errs  on  the  side  of 
conservatism,  if  at  all,  is  seen  when  the  value  of  the  men 
lost  is  arrived  at  by  using  the  average  worth  of  an  individ- 
ual as  estimated  by  the  various  authorities.  By  this  cal- 
culation the  total  loss  amounts  to  more  than  $45,000,- 
000,000. 

Other  Indirect  Costs. — No  attempt  will  be  made  to  go 
into  detail  in  describing  the  numerous  other  indirect  costs. 
Many  of  them  have  been  known  and  felt  by  every  reader. 
One  which  will  have  to  be  reckoned  with  for  years  to  come 
will  be  the  effects  of  disease  whose  start  can  be  traced 
to  the  camps  or  trenches.  While  the  medical  staff  was  no 
doubt  more  efficient,  and  greater  precautionary  measures 
were  taken  than  in  any  previous  conflicts,  yet  the  burden 
of  disease  will  not  be  inconsiderable.  The  hardships  borne 
by  the  civil  population,  moreover,  has  decreased  their 
stamina  and  vitality  so  that  they  are  a  more  ready  prey 
to  disease,  and  a  marked  increase  in  the  death  rate  has 
already  been  noted.  The  psychic,  and  often  the  physical 


504  OUTLINES  OF  PUBLIC  FINANCE 

burden  endured  by  the  families  of  the  men  in  the  service, 
and  which  are  still  being  endured  where  the  men  did  not 
return,  is  of  course  incapable  of  measurement.  Such 
phases  of  war  must  be  accepted  and  silently  borne  without 
counting  the  cost. 

One  or  two  other  phases,  however,  present  features  of 
a  nature  more  concrete.  An  estimate  can  be  placed  upon 
the  value  of  goods  destroyed,  and  everyone  can  think  of 
services  that  the  states  might  have  rendered  with  the 
funds  which  were  used  up  in  the  war.  Then  there  was  a 
loss  sustained  by  neutral  countries,  the  loss  from  dis- 
turbed production  in  all  countries,  and  the  loss  from  the 
continued  upheaval  in  the  industrial  and  political  world. 
To  the  costs  which  have  been  enumerated  should  be 
added,  also,  the  vast  amount  spent  by  civilian  organiza- 
tions in  the  various  phases  of  war  work.  The  activities 
of  such  organizations  as  the  Young  Men's  Christian  Asso- 
ciation, the  Red  Cross,  the  Salvation  Army,  and  the 
Knights  of  Columbus,  as  well  as  the  many  societies  for 
various  phases  of  war  relief,  are  well  known. 

In  concluding  this  survey  of  the  cost  of  war,  nothing 
more  significant  can  be  done  than  to  give  Professor 
Bogart's  summary  of  his  carefully  estimated  direct  and 
indirect  costs  of  the  Great  War,  followed  by  his  conclusion. 

DIRECT  AND  INDIRECT  COSTS  OF  THE  GREAT  WAR 

Total  direct  costs,  net $186,333,637,097 

Indirect  costs: 

Soldiers $  33,551,276,280 

Civilians 33,551,276,280 

Property  costs: 

On  land 29,960,000,000 

Shipping  and  cargo 6,800,000,000 

Loss  of  production 45,000,000,000 

War  relief 1,000,000,000 

Loss  to  neutrals 1,750,000,000 


$151,612,542,560 
Total  indirect  costs $151,612,542,560 


Grand  Total $337,946,179,657 


THE  COST  OF  WAR  505 

The  figures  presented  in  this  summary  are  both  incomprehensible 
and  appalling,  yet  even  these  do  not  take  into  account  the  effect  of 
the  war  on  life,  human  vitality,  economic  well-being,  ethics,  morality, 
or  other  phases  of  human  relationships  and  activities  which  have  been 
disorganized  and  injured.  It  is  evident  from  the  present  disturbances 
in  Europe  that  the  real  costs  of  the  war  cannot  be  measured  by  the 
direct  money  outlays  of  the  belligerents  during  the  five  years  of  its 
duration,  but  that  the  very  breakdown  of  modern  economic  society 
might  be  the  price  exacted.1 

1  Bogart,  p.  299.    See  note,  p.  494. 


CHAPTER  XXI 

CONCLUSION 

246.  The  Fiscal  Burden  Will  Continue  to  Be  Large.— 
In  the  preceding  chapters  an  attempt  has  been  made  to 
give  an  outline  of  the  growth  of  public  expenditures,  of 
the  development  of  revenue  systems  to  meet  this  growth, 
and  of  some  of  the  problems  which  have  been  encountered 
because  of  this  rapid  growth  in  the  amount  of  expendi- 
tures and  revenues.  The  public  has  become  accustomed 
to  large  expenditures — our  first  billion-dollar  Congress  a 
few  years  ago  caused  considerable  comment,  yet  no  one 
expects  that  a  single  Congress  will  again  spend  so  little. 
The  expenditures  of  the  Federal  government,  at  that  time, 
were  little  noticed  because  of  the  reliance  upon  indirect 
taxes — customs  duties  and  internal  revenues — for  practi- 
cally the  entire  amount  of  its  income.  While  these  taxes 
are  no  less  burdensome  than  direct  taxes,  yet  the  burdens 
are  not  known,  and  consequently  cause  less  objection  from 
those  who  pay  them.  Indirect  taxes,  therefore,  are  of 
advantage  to  the  state,  in  that  large  sums  may  be  raised 
with  practically  no  complaint  from  its  citizenship.  They 
are  objectionable,  however,  in  that  their  incidence  cannot 
be  accurately  determined;  hence  it  is  difficult  to  use  them 
extensively  in  a  system  of  taxes  which  is  expected  to  con- 
form to  the  principles  of  justice. 

Change  in  Public  Activity. — As  civilization  and  states 
develop,  two  tendencies  appear — states  take  on  a  greater 
number  and  variety  of  functions,  and  direct  taxes  occupy 
a  place  of  greater  fiscal  importance  in  the  revenue  system. 
These  have  been  amply  illustrated  in  the  United  States. 


CONCLUSION  507 

The  functions  of  government  have  been  gradually  ex- 
tended, previous  privately  conducted  industries  have 
been  taken  over  by  the  various  political  units,  and  the 
services  often  given  free  or  at  a  small  fraction  of  the 
actual  cost. 

The  most  extensive  illustration  of  this  changed  condi- 
tion is  found  in  education  and  in  highways.  The  patrons 
of  the  districts  no  longer  build  schoolhouses  and  hire 
teachers,  nor  are  the  users  of  the  highways  longer  incon- 
venienced by  tollgates.  Such  services  are  now  freely 
given,  but  entail,  necessarily,  a  situation  which  calls  for 
additional  revenue.  Another  situation  which  has  devel- 
oped in  the  United  States  is  the  disappearance  of  the  dif- 
ferentiation between  the  functions  of  various  states  and 
those  of  the  Federal  government.  The  Federal  govern- 
ment can  now  aid  in  the  construction  of  highways,  in  the 
advancement  of  education,  in  the  eradication  of  disease 
and  destructive  insects,  without  the  fear  of  being  criti- 
cized for  interfering  with  the  rights  of  the  states. 

The  states  more  and  more  take  the  attitude  that  they 
will  accept  the  residual  functions — that  is,  let  the  Federal 
government  do  what  it  will  and  they  will  do  what  is  left. 
This  gradual  extension  of  the  activities  of  the  Federal 
government  to  services  of  such  a  tangible  nature  that  the 
citizens  can  appreciate  and  measure  some  of  the  benefits, 
has  made  it  possible  to  enlarge  the  use  of  direct  taxes. 
The  constitutional  provisions  placed  extensive  limitations 
upon  the  use  of  this  form  of  revenue,  but  amendments 
and  court  interpretations  have  practically  destroyed  the 
former  prohibitory  restrictions.  The  removal  of  the  re- 
strictions was  sanctioned  because  of  the  services  of  a 
tangible  nature  that  the  Federal  government  was  ren- 
dering. 

Present  Public  Burdens. — The  present  burdens  inflicted 
by  the  Federal  government  are  so  familiar  as  to  need  little 
comment.  In  1900  the  per  capita  expenditure  was  about 
five  dollars;  in  1915  about  eight  dollars;  while  in  1920  it 


508  OUTLINES  OF  PUBLIC  FINANCE 

was  about  thirty-five  dollars.  This,  of  course,  is  abnormal, 
but  it  cannot  be  expected  that  the  burdens  will  ever  re- 
turn to  the  pre-war  basis.  The  war  has  added  burdens 
which  will  continue  to  be  felt  for  decades  to  come.  The 
interest  and  sinking  fund  charges  are  now  larger  than  the 
total  expenditures  before  the  war,  and  will  continue  to  be 
felt.  These,  with  the  constant  expansion  of  functions, 
will  continue  to  keep  the  exactions  of  the  Federal  govern- 
ment from  its  citizens  at  a  high  figure. 

Increased  expenditures  are  found  also  in  the  states  and 
local  political  units.  Each  of  these  conditions  is  an  illus- 
tration that  a  government  is  an  institution  of  increasing 
cost.  Even  though  no  more  functions  be  undertaken, 
the  per  capita  cost  increases  as  the  population  grows. 
But  states  and  cities  also,  due  to  the  demands  of  their 
inhabitants,  are  increasing  the  services  which  they  render. 
Figures  were  given  to  show  this  increase,  and  there  is  no 
indication  but  that  it  will  continue. 

There  is,  Jhowever,  a  difference  between  an  increased 
tax  and  an  increased  burden — a  situation  which  has  been 
especially  applicable  in  the  last  few  years.  When  com- 
modity prices  rise  for  individuals,  they  rise,  pan  passu, 
for  the  state.  This  means  that  the  state  may  supply 
exactly  the  same  services,  but  at  a  greater  cost,  which 
will  be  reflected  in  the  higher  taxes.  From  the  standpoint 
of  the  taxpayer  it  will  mean  that  he  is  paying  in  a  cur- 
rency of  less  purchasing  power,  and  hence  the  burden  will 
be  no  greater  than  when  the  taxes  were  less.  While  taxes 
have  increased  in  all  states  and  cities,  in  most  cases  the 
increase  has  not  been  in  proportion  to  the  general  rise  in 
prices. 

247.  Different  Political  Units  Will  Use  the  Same  Bases 
for  Taxes. — The  Constitution  of  the  United  States  is 
rather  insistent  upon  a  separation  of  sources  of  revenue 
for  the  Federal  government  and  for  the  states.  Thus 
customs  duties  were  reserved  entirely  for  the  use  of  the 
central  authorities,  while  close  restrictions  were  placed 


CONCLUSION  509 

upon  the  use  of  direct  taxes.  Excise  taxes  were  allowed 
and  have  been  used  extensively  since  the  Civil  War. 
The  states  are  not  forbidden  to  use  this  source  of  revenue, 
but  they  have  left  it  to  the  almost  exclusive  use  of  the 
Federal  government  for  so  long  that  the  presumption  has 
been  against  their  entering  this  field.  Direct  taxation  of 
property  was  looked  upon  as  the  primary  legitimate 
source  of  revenue  for  the  states  and  local  political  units, 
and  for  many  years  the  systems  remained  almost  true  to 
form. 

Overlapping  of  Sources. — The  changed  economic  and  in- 
dustrial conditions  and  the  enlargement  of  the  functions 
of  the  government  called  for  changes  which  have  taken 
place  very  rapidly  in  the  last  few  years.  These  have 
taken  two  opposite  directions — one  toward  an  overlap- 
ping of  sources  of  revenue,  and  the  other  toward  a  separa- 
tion of  these  sources.  The  first  can  be  noticed  in  the  case 
of  the  Federal  government.  It  has  not  been  content  to 
secure  funds  to  meet  its  increased  needs  by  an  extended 
use  of  customs  and  excise  taxes,  but  has  continued  to 
reach  out  to  other  fields.  This  has  taken  place  until  the 
net  income  and  profits  of  corporations,  inheritances,  and 
the  income  of  individuals  are  called  upon  to  help  supply 
the  bases  for  the  funds. 

The  state  authorities  have  looked  upon  this  expansion 
with  no  little  concern,  and  have  frequently  voiced  strong 
objections.  Some  of  the  sources,  as  profits  and  inheri- 
tances, were  tapped  to  supply  the  extraordinary  demands 
of  war,  and  may  be  given  up  quickly,  yet  no  one  expects 
but  that  income  taxes  will  be  a  permanent  feature  of  Fed- 
eral fiscal  machinery.  Even  before  the  Federal  govern- 
ment began  its  expansion  of  sources,  the  states  had  ceased 
to  place  entire  reliance  on  property  taxes.  The  other 
sources  of  importance  which  have  been  adopted  are  taxes 
upon  corporations,  inheritances,  and  various  classes  of 
licenses.  Incomes  are  taxed  in  some  states,  and  it  is  likely 
that  this  source  will  become  more  popular  as  a  method  of 


510  OUTLINES  OF  PUBLIC  FINANCE 

state  levy.  Thus  there  has  developed  an  overlapping  of 
the  sources  of  Federal  and  state  revenues  which  is  likely 
to  continue. 

Separation  of  Sources. — There  has  been  much  agitation, 
on  the  other  hand,  for  a  separation  of  the  sources  of  rev- 
enue for  states  and  localities.  It  has  been  suggested  that 
the  property  taxes  should  be  left  to  the  localities,  while 
the  state  seek  its  revenue  from  such  sources  as  corpora- 
tions, inheritances,  licenses,  and  incomes.  Some  progress 
has  been  made  in  this  direction,  but  in  most  states,  while 
the  local  governments  rely  upon  property  as  the  chief 
source  of  revenue,  the  state  governments  have  not  en- 
tirely removed  property  taxes  from  their  category  of  rev- 
enues. Recently,  moreover,  local  political  units  have 
shown  a  tendency  to  expand  their  source  of  revenue  to 
include  a  number  of  licenses,  many  of  them  upon  the 
same  objects  which  have  been  the  basis  of  license  taxes 
imposed  by  the  states.  The  licenses  which  are  levied 
against  automobiles  and  against  various  occupations  by 
both  states  and  municipalities  are  good  examples  of  this 
tendency.  Duplication  of  taxes  upon  the  same  base  by 
the  different  political  units,  even  though  it  may  involve 
a  form  of  double  taxation  and  make  the  shifting  of  taxes 
more  difficult  to  trace,  appears  to  be  gaining  a  stronger 
foothold  in  our  fiscal  system,  and  will  doubtless  be  a  per- 
manent feature. 

248.  The  Social  Point  of  View  Has  Gained  in  Promi- 
nence.— Tax  systems  may  and  must  be  looked  at  from 
many  angles — from  the  revenue  standpoint,  the  ease  of 
administration,  the  effect  upon  the  individual  or  industry 
upon  which  the  burden  is  placed,  and  from  the  social  con- 
sequences. In  the  formation  of  fiscal  systems  some  one 
of  these  phases  generally  has  an  outstanding  influence. 
In  a  system  of  indirect  taxes,  for  example,  much  impor- 
tance is  attached  to  the  consideration  of  revenue  and  the 
administrative  problems.  Frequently  a  consideration  of 
the  individual  has  been  the  center  of  thought — each  indi- 


CONCLUSION  511 

vidual  should  bear  tax  burdens  in  accordance  with  his 
ability.  And  through  the  attempt  to  apply  this  idea  of 
ability,  the  studies  of  shifting  and  incidence,  of  proper  ad- 
ministrative machinery,  and  of  the  effects  of  borrowing, 
have  resolved  themselves  into  studies  of  the  individual 
and  his  burdens. 

Faculty  and  Utilitarian  Principles. — In  recent  years  the 
idea  of  faculty  has  begun  to  take  on  a  more  expansive 
aspect,  and  social  considerations  are  beginning  to  have  a 
place.  The  fact  is  being  recognized  that  privileges  granted 
by  the  state  are  factors  which  contribute  to  the  ability  to 
meet  burdens,  and  these  are  being  included  in  the  basis 
for  taxes.  This  takes  a  variety  of  forms,  but  two  of  the 
best  examples  occur  hi  the  taxation  of  the  privilege  of 
inheritance  and  in  the  privilege  of  corporate  organization. 
This  same  tendency  is  also  seen  hi  the  wide  extension  of 
the  use  of  the  license  system,  and  hi  the  use  of  taxes  for 
sumptuary  and  regulatory  purposes.  While  taxes  may 
not  be  the  best  method  of  handling  undesirable  practices, 
yet  their  use  for  this  purpose  shows  that  social  aspects 
have  received  consideration. 

More  consideration  is  also  being  given  to  the  general 
social  effects  of  taxes,  or  what  was  designated  in  an  earlier 
chapter  as  the  utilitarian  principle.  It  is  recognized,  for 
example,  that  two  industries  may  have  exactly  the  same 
ability  to  meet  burdens,  yet  the  curtailment  of  one  by  a 
tax,  or  the  increase  hi  the  price  of  its  products  through  a 
process  of  shifting,  would  work  a  much  greater  hardship 
upon  society  than  would  a  similar  tax  placed  upon  the 
other  industry.  Consequently,  in  the  formulation  of  fiscal 
principles,  more  attention  is  being  directed  to  the  ultimate 
effects  and  burdens,  and  a  greater  effort  is  being  made  to 
secure  the  greatest  good  to  the  greatest  number. 

249.  The  Employment  of  Fiscal  Experts  Is  Encouraging. 
— The  formulation  of  fiscal  legislation,  not  many  years 
ago,  was  characterized  by  the  selfishness  and  caprice  of 
politicians.  The  men  who  secured  berths  on  committees, 


512  OUTLINES  OF  PUBLIC  FINANCE 

empowered  with  the  business  of  shaping  fiscal  legislation, 
were  generally  qualified  as  politicians  rather  than  in  the 
fundamental  principles  and  facts  of  Public  Finance.  In 
the  administration  of  fiscal  laws  the  system  was  no  better. 
The  force  of  the  spoils  system  placed  the  valuable  politi- 
cian in  office  rather  than  an  efficient  administrator,  and 
haphazard,  inefficient,  and  wasteful  methods  were  the  re- 
sult. Too  frequently  the  elected  official,  as  the  local  as- 
sessor, was  dependent  upon  his  constituency  for  con- 
tinuance in  office,  and  the  result  was  favoritism  at  the 
price  of  justice  and  efficiency. 

In  Federal  Government. — To  some  extent  this  situation 
is  still  true,  but,  as  a  general  proposition,  it  is  rapidly 
changing.  A  few  years  ago  members  of  Congress,  to  a 
great  extent,  were  all-wise  beings,  and  felt  the  need  of  no 
expert  advice.  The  present  situation  of  having,  perhaps, 
our  greatest  authority  on  fiscal  matters  as  chairman  of 
an  advisory  tax  board  for  the  United  States  Internal 
Revenue  Department,  would  have  been  looked  upon,  a 
decade  or  two  ago,  as  a  somewhat  superfluous  arrange- 
ment. Yet,  that  the  situation  exists,  indicates  that  pub- 
lic officials  have  come  to  recognize  the  need  of  expert  ad- 
vice. The  establishment  of  a  tariff  commission  points  in 
the  same  direction. 

In  State  Governments. — The  use  of  trained  experts  has 
made  greater  progress  in  the  fiscal  program  of  states  and 
localities  than  in  that  of  the  national  government.  The 
pressure  for  revenues  and  the  limitation  of  sources  de- 
manded that  something  be  done.  First,  honesty  of  officials 
was  demanded,  but  it  was  soon  found  that  this  was  not 
enough.  Cities  began  to  see  that,  just  as  private  business 
grew  through  strong  centralization,  so  efficient  and  re- 
sponsible administration  demanded  a  central  and  qualified 
corps  of  officials.  The  adoption  of  the  commission  or  the 
city  manager  plan  of  government  has  been  the  result.  In 
addition,  there  have  been  added,  in  many  municipalities, 
expert  accountants,  bureaus  of  public  efficiency,  and 


CONCLUSION  513 

similar  officials,  each  prepared  for  his  particular  duty,  all 
for  the  sake  of  securing  a  more  efficient  administration  of 
the  public  revenues  and  expenditures. 

The  Tax  Commission. — The  states,  likewise,  have  shown 
the  inclination  to  get  away  from  politics  in  fiscal  affairs, 
and  to  center  more  or  less  responsibility  in  some  body  of 
men,  usually  called  the  State  Tax  Commission,  chosen  on 
the  basis  of  their  expert  knowledge  of  fiscal  affairs.  The 
powers  of  the  boards  vary  all  the  way  from  the  mere  act 
of  advice  to  the  centralizing  of  the  entire  fiscal  system  of 
the  state  in  their  hands.  The  tenure  of  office  is  usually 
made  long  enough,  and  the  salary  high  enough,  to  attract 
men  who,  because  of  training  and  experience,  are  qualified 
to  handle  wisely  and  efficiently  the  problems  which  are 
placed  before  them. 

In  addition  to  the  regular  commissions,  the  special  tax 
commission  has  been  an  institution  of  frequent  occurrence 
in  recent  years.  To  this  body  of  experts,  of  which  these 
commissions  are  composed,  is  assigned  some  special  prob- 
lem for  investigation  and  solution.  The  difficulty  still 
remains,  however,  to  a  somewhat  marked  degree,  that 
legislatures  are  not  willing  to  accept  the  advice  of  these 
standing  and  special  commissions,  and  to  put  into  effect 
the  fiscal  policies  which  they  formulate. 

250.  The  Study  of  Fiscal  Subjects  Is  Increasing. — That 
a  .greater  interest  is  being  taken  in  the  expenditures  and 
revenues  of  the  various  political  units  is  evidenced  by  the 
increased  study  of  these  problems  which  is  being  carried 
on,  both  by  those  directly  connected  with  the  formation 
and  administration  of  tax  laws,  and  by  those  who  act  in 
no  official  capacity.  It  is  a  hopeful  sign  that  a  systematic 
study  of  fiscal  problems  is  rapidly  finding  a  place  in  the 
curriculums  of  our  colleges  and  universities.  The  old  idea 
that  an  education  consists  almost  entirely  in  gaining  a 
knowledge  of  the  so-called  " cultural"  subjects  is  passing, 
and  the  notion  is  gaining  prevalence  that  higher  educa- 
tional institutions  should  impart  more  knowledge  having 


514  OUTLINES  OF  PUBLIC  FINANCE 

immediate  application  to  the  world  in  which  the  student 
lives.  The  emphasis,  consequently,  is  no  longer  being 
placed  so  exclusively  on  Lathi,  Greek,  and  Mythology, 
but  the  facts  of  modern  society  are  given  more  attention. 
In  practically  all  the  large  universities,  and  in  many  of  the 
smaller  institutions,  therefore,  courses  are  found  which 
deal  specifically  with  fiscal  problems.  Such  a  develop- 
ment of  study  is  hopeful,  for  it  should  place  in  each  com- 
munity a  group  of  leaders  who  should  be  vitally  interested 
in  the  expenditures  and  revenues  of  then*  district,  as  well 
as  those  of  the  state  and  nation. 

These  leaders,  who  have  learned  to  think  sanely  and 
clearly  on  the  principles,  will  be  able  to  peer  beneath  the 
surface  and  separate  the  true  evidence  from  the  false,  and 
will  be  deeply  enough  grounded  that  they  should  not  be 
easily  swayed  by  partisan  politics  or  party  slogans,  when 
the  issue  is  essentially  one  of  economic  interests.  It  has 
been  a  source  of  much  gratification  to  the  author  to  note 
the  interest  his  students  have  displayed  in  working  up 
reports  on  the  expenditures  and  revenues  of  their  home 
communities.  That  this  interest  has  not  been  merely  a 
passing  one  is  evidenced  by  the  letters  which  are  received 
from  former  students,  in  which  attention  is  called  to  dif- 
ferent fiscal  situations  which  have  come  under  their  ob- 
servation, and  that  they  are  now  able  to  see  the  facts  hi 
the  case. 

Outside  the  colleges  and  universities  the  same  tendency 
to  study  fiscal  problems  is  making  itself  manifest.  Or- 
ganizations, both  national  and  state,  have  been  established 
for  this  purpose,  and  are  doing  a  good  work.  Authorities 
in  various  fields  work  out  their  respective  problems  and 
usually  assemble  at  least  once  a  year  to  discuss  the  fiscal 
situation  and  to  interchange  ideas.  The  National  Tax 
Association  is  the  best  illustration  of  this  form  of  organiza- 
tion on  a  national  basis.  The  annual  state  conferences  on 
taxation  in  New  York  are  largely  for  the  purpose  of 
studying  the  fiscal  problems  of  that  state.  Conferences  of 


CONCLUSION  515 

various  classes  of  officials  are  also  frequently  held  for  the 
purpose  of  studying  problems  peculiar  to  their  duties. 
Conferences  of  local  assessors,  for  example,  frequently  oc- 
cur to  discuss  the  problem  of  the  discovery  and  valuation 
of  property. 

The  study  which  has  been  done,  and  that  which  is  being 
carried  on  at  present,  will  facilitate  the  future  investiga- 
tion of  fiscal  problems.  There  is  gradually  being  collected 
a  quantity  of  valuable  literature,  both  in  this  country  and 
hi  other  countries,  which  is  common  property  to  all  pres- 
ent and  future  students.  The  reports  which  have  been 
published  by  the  various  special  and  permanent  commis- 
sions are  supplemented  by  published  proceedings  of  the 
numerous  conferences  which  are  held  every  year. 

251.  A  More  Enlightened  Public  Is  Needed. — One  of 
the  outstanding  needs  hi  the  further  perfection  of  fiscal 
systems,  and  one  which  can  only  come  with  the  gradual 
dissemination  of  knowledge  as  to  the  nature  of  expendi- 
tures and  revenues,  is  an  enlightened  public.  The  nature 
of  public  expenditure  is  too  often  overlooked,  or  not  under- 
stood. Individuals  and  communities  frequently  assume 
the  attitude  that  it  makes  little  difference  whether  any 
return  is  rendered  for  receipts  from  public  treasuries. 
The  Congressman  who  succeeds  in  getting  a  massive  gov- 
ernment building  for  his  home  village  has  been  a  benefac- 
tor. The  discharged  soldier  points  with  pride  to  the 
equipment  he  managed  to  purloin  from  the  government. 
These  illustrations  but  represent  an  aspect  as  it  appears 
at  first  sight.  Governments  generally  depend  upon  their 
citizens  for  their  funds,  since  they  have  no  magic  source 
of  supply.  A  government  expenditure,  then,  is  a  removal 
of  funds  from  one  pocket  for  the  purpose  of  putting  them 
into  the  other,  with  some  deductions  for  the  expense  of 
handling.  If  the  amount  is  not  taken  from  the  pockets  of 
the  particular  individuals  who  receive  the  benefits,  it 
must  be  taken  from  those  of  their  neighbors,  so  there  is 
no  gain  to  society.  When  individuals  realize  that  it  is 


516  OUTLINES  OF  PUBLIC  FINANCE 

their  demands  upon  the  government  that  cause  the  in- 
crease in  tax  burdens,  they  will  be  more  concerned  about 
the  demands  which  are  made. 

It  naturally  follows  that  the  citizenship  of  a  state  should 
have  some  adequate  knowledge  of  what  constitutes  proper 
expenditures.  Obviously  this  will  depend  upon  the  con- 
ception which  may  be  held  as  to  the  proper  functions  of 
the  state.  An  anarchist  and  a  socialist,  for  example, 
would  have  difficulty  in  coming  to  an  agreement  on  the 
proper  lines  of  activity  upon  which  a  state  may  properly 
enter.  Yet,  in  order  that  the  citizenship  may  have  some 
notion  as  to  whether  they  are  receiving  a  value  commen- 
surate with  the  tax  burden,  they  should  have  hi  mind 
some  measure  of  the  proper  activities  for  state  initiative. 
In  general,  the  citizen  should  feel  that  a  greater  value  is 
being  given  when  the  funds  are  being  expended  through 
his  public  representatives  than  if  they  had  been  left  to  be 
expended  by  himself.  A  study  of  public  expenditures, 
with  this  in  mind,  will  lead  to  a  closer  scrutiny  of  the  acts 
of  public  officials,  and  will  hold  them  to  a  more  strict  ac- 
countability for  the  way  hi  which  public  funds  are  spent. 

The  citizen,  moreover,  should  become  so  enlightened 
that  he  will  demand  the  efficient  management  of  public 
funds.  It  has  frequently  been  said  that  if  the  business 
principles  which  are  used  hi  conducting  the  various  politi- 
cal units  were  applied  to  a  private  enterprise,  it  would 
soon  be  forced  to  bankruptcy.  Too  many  candidates  who 
run  on  efficiency  platforms  leave  the  platforms  behind 
when  they  assume  the  duties  of  office.  The  citizens  have  a 
right  to  demand,  and  in  the  interest  of  reducing  the  public 
burden  and  in  securing  value  received  for  their  taxes,  should 
demand,  as  exacting  business  principles  in  the  conduct  of 
the  state  as  in  the  conduct  of  private  business  enterprise. 

With  an  increased  study  of  fiscal  problems  by  the 
officials  who  must  administer  them,  and  by  students  who 
are  to  become  the  leaders  in  civic  life,  through  whom 
knowledge  will  be  disseminated  to  the  public  as  a  whole, 


CONCLUSION  517 

problems  of  expenditure  and  revenue  may  be  expected  to 
be  handled  much  more  efficiently  in  the  future  than  they 
have  been  in  the  past. 

252.  Tax  Laws  Need  Simplification. — It  has  been  the  in- 
tention in  the  preceding  pages  to  mention  and  discuss 
only  some  of  the  more  important  considerations  that  con- 
front fiscal  students  and  officials.     Many  others  have 
doubtless  occurred  to  the  reader.    Each  locality,  of  course, 
has  its  own  peculiar  problems  and  difficulties,  which  could 
not  be  specifically  treated.    It  is  hoped,  however,  that  a 
study  of  the  previous  pages  will  prove  an  aid  in  the  better 
understanding  and  solution  of  the  problems  which  have 
not  been  specifically  treated. 

One  objective  that  is  worthy  of  the  efforts  of  every 
official  and  taxpayer  who  desires  a  simpler  fiscal  system, 
is  to  eliminate  the  complexity  that  is  now  found  in  many 
of  our  tax  laws.  Of  the  complexity  existing  at  present 
examples  need  be  cited  only  of  the  Federal  income  tax 
law,  the  excess  profits  tax  law,  and  many  of  the  state 
laws,  such  as  the  New  York  system  for  taxing  corpora- 
tions. Individuals  and  corporations  desire  to  have  some 
reasonable  idea  as  to  how  much  tax  they  will  have  to  pay 
without  the  necessity  of  employing  an  attorney  to  aid  in 
making  the  calculations.  The  difficulties  do  not  even 
stop  here,  for  the  courts  are  crowded  with  tax-adjustment 
proceedings,  many  of  which  are  of  years'  standing.  This 
element  of  uncertainty  is  disconcerting  both  to  the  tax- 
payer and  to  the  officials  who  must  calculate  the  amount 
of  revenue  which  will  be  received.  The  state  tax  commis- 
sions of  some  states  have  done  much  to  secure  a  simplifica- 
tion of  fiscal  statutes,  but  much  remains  to  be  done  in 
both  the  Federal  and  state  laws. 

253.  Attempts  Have  Been  Made  to  Outline  a  Model 
System  of  Taxation. — The  difficulties  which  have  been 
considered  in  the  foregoing  pages  have  weighed  heavily 
upon  the  minds  of  fiscal  students  and  officials  who  have 
been  interested  in  a  greater  degree  of  justice  and  simpli- 


518  OUTLINES  OF  PUBLIC  FINANCE 

fication  in  the  tax  system  as  a  whole.  Attempts  have 
been  made  to  formulate  schemes  which  have  been  called 
"  model  tax  systems.' '  If  only  one  political  unit  were  to 
be  considered,  this  could  be  done  with  comparative  ease. 
Where  there  are  as  many  competing  jurisdictions  as  are 
to  be  found  in  the  United  States,  however,  the  difficulties 
which  are  encountered  by  one  who  attempts  to  formulate 
a  tax  system  which  embodies  the  principles  of  justice, 
simplicity,  and  adequacy  can  be  readily  imagined.  After 
much  consideration  and  deliberation,  a  committee  which 
worked  under  the  auspices  of  the  National  Tax  Associa- 
tion formulated  a  plan  which  embodies  these  principles  in 
a  high  degree.  The  model  tax  system,  as  given  by  this 
committee,  is  worthy  of  the  study  of  those  who  may  have 
occasion  to  be  interested  in  tax  reform.  The  report  em- 
bodies the  following  principles: l 

(1)  Every  person  having  taxable  ability  should  pay  some  sort  of 
direct  personal  tax  to  the  government  under  which  he  is  domiciled,  and 
from  which  he  receives  the  personal  benefits  that  government  confers. 

(2)  Tangible  property,  by  whomsoever  owned,  should  be  taxed  by 
the  jurisdiction  in  which  it  is  located,  because  it  there  receives  protec- 
tion and  other  governmental  benefits  and  services. 

(3)  Business  carried  on  for  profit  in  any  locality  should  be  taxed  for 
the  benefits  it  receives.    If  the  owners  of  the  business  are  residents  of 
the  state,  this  principle  need  not  be  appealed  to,  since  the  ordinary 
methods  of  taxation  may  be  considered  to  provide  for  such  a  case. 

(4)  A  personal  income  tax  is  the  best  method  of  enforcing  the  per- 
sonal obligation  of  the  citizen  for  the  support  of  the  government  under 
which  he  lives.    This  tax  may  be  levied  only  upon  persons,  and  in  the 
states  where  they  are  domiciled. 

(5)  There  should  be  a  tax  upon  tangible  property,  levied  exclusively 
at  the  place  where  such  property  is  located.    Intangible  property  of  all 
descriptions  should  be  exempt  from  taxes. 

(6)  A  properly  constituted  business  tax  should  be  a  part  of  the 
system. 

(7)  Much  improvement  must  be  accomplished  in  fiscal  administration. 

1  Proceedings  of  the  Twelfth  Conference  of  the  National  Tax  Associa- 
tion, pp.  426-470. 


INDEX 


Ability  to  pay,  theory  of  taxes,  108; 
applied  to  inheritance  taxes,  317. 

Abominations,  tariff  of,  193. 

Accounting,  by  state  tax  commis- 
sion, 275;  municipal,  440;  com- 
mittee on  uniform  municipal,  440; 
in  New  York  City,  441. 

Activity,  public,  change  in,  506. 

Adams,  H.  C.,  fiscal  writer,  14. 

Adams,  T.  S.,  167  n. 

Administration  of  public  funds,  im- 
portance of  underestimated,  414; 
reasons  for  increased  interest  in, 
414;  should  harmonize  with  other 
institutions,  415;  expenditures 
carefully  scrutinized,  417;  sys- 
tematic in  England,  421;  in  other 
countries,  423;  unsystematic  in 
the  United  States,  426;  outlook 
encouraging,  443. 

Administration  of  revenues,  early 
study,  10;  importance  of,  20. 

Administrative  expenditures,  57. 

Administrative  machinery,  for  cus- 
toms duties,  187;  for  excise 
duties,  213. 

Ad  valorem,  defined,  99;  difficulties 
with,  186;  applied  to  corpora- 
tions, 351. 

Agricultural  Appropriations,  com- 
mittee on  established,  427. 

Aid,  early  revenue,  95. 

Alaska,  part  of  public  domain,  79. 

Amendment,  income  tax,  299;  to 
constitution  of  Oregon,  380. 

American  Federation  of  Labor,  on 
sales  tax,  474. 

American  writers,  14,  15. 

Annual  franchise  tax  of  New  York, 
341 , 


Apportioned  taxes,  115;  results  of, 
236. 

Apportionment  of  revenue,  under 
single  tax,  374. 

Appropriation  bill,  course  of,  430. 

Armies,  cost  of  maintaining,  53; 
functions  of,  55. 

Arthur,  President,  appoints  tariff 
commission,  196. 

Articles  of  Confederation,  fiscal  pro- 
visions of,  150. 

Assessment,  defined,  100;  equaliza- 
tion of,  273;  control  of,  274;  of 
corporations,  276. 

Assessment  day,  239. 

Assessor,  the,  238;  and  oath,  261; 
in  New  York  City,  274. 

Assessors'  reports,  on  property  tax, 
253. 

Assistant  Comptroller-general,  of- 
fice created,  435. 

Auditing,  by  state  tax  commission, 
275. 

Augustus,  Emperor,  use  of  inherit- 
ance tax,  310. 

Australia,  income  tax  in,  296;  in- 
heritance tax  in,  333;  financing 
Great  War  in,  479. 

Austria,  income  tax  in,  296;  in- 
heritance tax  in,  333;  financing 
Great  War  in,  481;  daily  expen- 
diture for  Great  War  in,  495; 
expansion  of  note  circulation  in, 
499. 

Authority,  lack  of  centralized,  431. 

Automobiles,  licensing  of,  228. 

B 

Back  tax  argument  for  inheritance 

tax,  317. 
Ballantine,  Arthur  A.,  on  sales  tax, 

474. 


520 


OUTLINES   OF   PUBLIC   FINANCE 


Bancroft,  Blakemore  and,  on  in- 
heritance taxes,  318. 

Bankers  Trust  Company,  statistics 
of  indebtedness,  412. 

Banks,  taxation  of,  356;  use  of  in 
war  finance,  470,  475,  478. 

Base,  defined,  99. 

Bastable,  writer,  14. 

Bede,  early  revenue,  95;  early  use 
in  Prussia,  146. 

Belgium,  increase  in  expenditure, 
29;  inheritance  tax  in,  333. 

Benefit,  expenditures  classified  ac- 
cording to,  49. 

Benefit  theory,  106;  difl&culties,  107; 
attitude  of  courts,  108;  applied 
to  inheritance  tax,  315. 

Benevolence,  early  revenue,  95; 
special  fund,  140. 

Bentham,  on  inheritance  tax,  311. 

Blakemore  and  Bancroft,  on  in- 
heritance taxes,  318. 

Bodin,  early  writer,  11,  12;  on  pub- 
lic funds,  23;  classification  of 
revenues,  76. 

Bogart,  E.  L.,  on  cost  of  war  494, 
503,  504. 

Bonds,  capitalization  of  tax  on,  168; 
concentration  of  in  hands  of  few, 
395;  problems  connected  with 
floating,  402 ;  freedom  from  taxes, 
402;  size  of,  403;  disposal  of, 
403;  use  of  serial  in  cities,  442; 
issued  by  the  United  States  dur- 
ing Great  War,  469. 

Book  of  estimates,  transmitted  to 
Congress,  429. 

Borrowing,  limitation  of,  267;  pro- 
duces revenue  quickly,  449; 
causes  expansion  of  credit,  450; 
does  not  shift  burden  to  future, 
452;  burden  may  be  shifted  to 
other  classes,  454;  has  legitimate 
place  in  emergency  financiering, 
458;  used  in  War  of  1812,  462; 
used  in  Civil  War,  463;  of  the 
United  States  in  Great  War,  469. 

Bounties,  68;  compared  with  tariff, 
69;  under  McKinley  tariff,  196. 


Brushaber  vs.  Union  Pacific  Rail- 
road, 301  n. 

Budget,  meaning  of,  420;  forma- 
tion and  passage  of  in  England, 
421;  in  Germany,  423;  in  France, 
424;  in  Canada,  425;  in  United 
States  unsystematic,  426;  much 
agitation  for  reform,  432;  recent 
legislation,  433;  in  American 
states,  435;  in  municipalities, 
441. 

Buildings,  early  tax  on  in  Prussia, 
146;  shifting  of  tax  on,  166; 
separate  value  on  land  and,  373. 

Bullock,  C.  J.,  30  n;  on  war  costs, 
491. 

Burden,  fiscal,  will  continue  to  be 
large,  506;  present  public,  507. 

Burdenless  taxes,  conclusion  re- 
garding, 169. 

Bureau  of  internal  revenue,  213. 

"Business  as  usual,"  not  possible 
during  war,  448. 

Business  taxes,  224;  in  France,  224; 
in  Prussia,  225;  in  America,  226; 
objections  and  advantages,  227. 


California,  inheritance  tax  in,  332; 
tax  commission  favors  gross  earn- 
ings tax,  346;  single  tax  campaign 
in,  381. 

Canada,  reciprocity  treaty  with, 
182;  income  tax  in,  296;  inherit- 
ance tax  in,  333;  single  tax  in, 
383;  budget  in,  425;  financing  of 
Great  War  in,  479. 

Canons  of  Taxation,  101. 

Capital,  and  income,  280;  stock 
and  ability,  249;  burden  of  in- 
heritance tax  on,  319;  tax  on  of 
corporations,  340;  state  competi- 
tor for,  393. 

Capitalization  theory,  criticized, 
167;  correction  of  injustice  caused 
by,  168. 

Capitation  taxes,  202  n;  in  Ameri- 
can states,  222;  objections  to, 
223, 


INDEX 


521 


Carafa,  classification  of  expendi- 
tures, 23. 

Carnegie,  Andrew,  on  inheritance 
tax,  312. 

Census  bureau,  classification  of  ex- 
penditures, 47;  classification  of 
revenues,  90. 

Centralization  of  fiscal  authority, 
advantages  of,  274. 

Characteristics  of  fiscal  systems,  15. 

Charity,  expenditures  for  by  public, 
66;  by  individuals,  67;  relief 
through  insurance  and  pensions, 
67. 

Chase,  Secretary,  and  excises,  217; 
and  Civil  War  finance,  463. 

Circulation,  expansion  of  note  dur- 
ing Great  War,  499. 

Cities,  expenditures  of,  33,  34,  52; 
for  protection,  55;  for  education, 
61;  and  forced  loans,  400;  in- 
debtedness of,  407,  409,  442;  ad- 
ministration of  finances,  439. 

Citizenship,  as  base  for  tax  levy,  246. 

City  equalization  boards,  259. 

Civil  War,  direct  tax  of,  152;  tariffs 
of,  195;  income  tax  of,  297; 
method  of  financing,  463;  cost 
of,  489;  war  costs  following,  491. 

Classification  of  property,  235; 
court  interpretation  of,  263; 
status  of,  264;  principle  of,  264; 
results  of,  265;  in  Pennsylvania, 
266;  in  Connecticut,  266. 

Clay,  Henry,  and  tariff,  194. 

Coercive  services,  74. 

Cohn,  writer,  12;  classification  of 
expenditures,  49. 

Collateral  inheritance,  314  n. 

Collection  of  revenue,  expenditures 
for,  60. 

Colorado,  and  property  classifica- 
tion, 264;  single  tax  in,  381. 

Commissioner  of  internal  revenue, 
and  excise  tax,  213,  214;  and  in- 
come tax,  305. 

Common  benefit,  miscellaneous  ex- 
penditures for,  65;  increase  in 
imoprtance,  72. 


Commutation,  meaning,  107. 

Compensating  tariff,  182. 

Compensatory  theory  of  taxes,  117. 

Compromise  tariff,  193. 

Comptroller-general,  office  created, 
435. 

Connecticut,  classification  of  prop- 
erty in,  266;  report  of  special  tax 
commission  on  corporations,  347, 
350. 

Conscience  fund,  136. 

Constant  cost,  shifting  of  tax  on 
goods  produced  under,  174. 

Constitution,  Federal,  fiscal  provis- 
ions of,  150;  limitation  upon 
states,  153;  amended  for  income 
tax,  299. 

Constitutionalism,  growth  of,  16. 

Consular  service,  expenditure  for, 
60. 

Consumption  taxes,  early  in  Prus- 
sia, 147. 

Contract  loans,  400. 

Control  over  income  and  expendi- 
ture, 16. 

Conversion  of  debt,  404. 

Corporate  excess,  taxation  of,  343. 

Corporations,  assessment  by  tax 
commission,  276;  hostile  attitude 
of  public  to,  335;  failure  of  exist- 
ing taxes  against,  336. 

Corporation  taxes,  found  in  states, 
155;  reasons  for  special,  335; 
take  form  of  franchise  taxes,  338; 
taxation  of  franchise  to  be,  339; 
upon  capital,  340;  on  public  util- 
ities, 343;  advantages  and  diffi- 
culties with  on  gross  earnings, 
345;  on  net  earnings  unsatisfac- 
tory, 348;  upon  value,  350;  re- 
form in  local,  353;  not  needed 
for  regulation,  354;  on  foreign 
corporations,  359;  by  Federal 
government,  360;  upon  transfer 
of  shares,  361 ;  of  Great  War,  468; 
shifting  and  incidence  of,  474. 

Corrective  institutions,  68. 

Costs  of  war,  presents  variety  of  as- 
pects, 484;  in  early  history  of  the 


522 


OUTLINES   OF   PUBLIC   FINANCE 


United  States,  486;  augmented 
by  Civil  War,  489;  following 
Civil  War,  491;  other  eclipsed  by 
cost  of  Great  War,  493;  influ- 
enced by  expansion  of  money  and 
credit  during  Great  War,  498; 
indirect  must  not  be  overlooked, 
601;  in  loss  of  life,  501;  other 
indirect,  503.  (See  Great  War.) 

Counties,  expenditures  of,  51. 

County  equalization  board,  260. 

Court  decisions,  influence  on  fiscal 
development,  256;  on  Civil  War 
income  tax,  297;  on  income  tax 
of  1894,  299;  on  income  tax  of 
1913,  300. 

Credit,  expansion  of  from  borrow- 
ing, 450;  expansion  of  and  cost 
of  Great  War,  498.  (See  Public 
Credit.) 

Credit  instruments,  taxation  of,  250. 

"Customary  duties,"  140. 

Customs  duties,  denned,  99,  177; 
in  England,  141;  reasons  for,  177, 
178;  incidence  of,  183;  borne  by 
importer,  184;  problems  with 
levy,  185;  administrative  ma- 
chinery, 187;  importance  of 
definite  principles,  187. 


Dallas,  Secretary,  and  emergency 
borrowing,  462. 

Dane-geld,  139. 

Daniels,  W.  M.,  writer,  15;  on  char- 
acteristics of  fiscal  systems,  15. 

Death  duties,  in  England,  141. 

Debts,  creation  of  fictitious,  248; 
tax  on  secured  in  New  York,  266. 

Declaration,  personal,  of  income, 
287. 

Decreasing  cost,  shifting  of  tax  on 
goods  produced  under,  174. 

Decrement,  unearned,  370. 

Deductions,  for  inheritance  tax,  322. 

Defectives,  care  of,  67;  expendi- 
tures for  insane,  68. 

Degressive  taxes,  n-with  in- 
comes, 285. 


Demand,  relation  to  shifting,  160; 
effect  of  elastic  on  shifting,  175; 
elastic  and  customs  duties,  183. 

Democratic  party,  and  tariff,  196. 

Dewey,  D.  R.,  statistics  from,  487. 

Diffusion  of  wealth,  argument  for 
inheritance  tax,  314. 

Diminishing  utility,  law  of,  applied 
to  incomes,  284. 

Dingley  tariff,  197. 

Diplomatic  service,  expenditure  for, 
60. 

Direct  consumption  tax,  203. 

Direct  inheritance,  314  n. 

Direction  of  shifting,  175. 

Direct  tax,  105;  early  in  Franco, 
143;  of  War  of  1812,  152;  of 
Civil  War,  152;  modern  in 
France,  144;  in  Federal  Consti- 
tution, 151,  152. 

Dispensary  system,  in  South  Caro- 
lina, 221. 

Diversification  of  industry,  under 
protective  duty,  180. 

Domicile,  as  base  fbT~ta"x  ievy,  246; 
as  base  for  inheritance  tax,  326. 

Donum,  early  revenue,  95. 

Double  taxation,  245;  evils  of,  245. 

Dual  taxation,  245. 

Duty,  early  revenue,  95. 

E 

Earnings,  relation  between  a  tax  on 
value  and,  352.  (See  Gross  Earn- 
ings and  Net  Earnings.) 

Economic  effects  of  public  borrow- 
ing, 393. 

Economy  and  Efficiency,  commit- 
tee on,  432. 

Edmonton,  single  tax  in,  384. 

Education,  cause  of  expenditure,  37, 
61;  expenditure  of  individuals 
for,  63. 

Eheberg,  on  public  and  private  ex- 
penditures, 25. 

Elastic  demand,  effect  on  shifting, 
175. 

Elastic  supply,  effect  on  shifting, 
175. 


INDEX 


523 


Elizabeth,  Queen,  grants  monopo- 
lies, 220. 

Emergency,  war  best  example  of 
financing  an,  445;  problem  to 
secure  materials,  446;  borrowing 
has  advantages,  448;  use  of  taxes 
in,  454;  borrowing  has  legitimate 
place,  458;  administrative  ma- 
chinery important,  458;  com- 
bination of  loans  and  taxes  forms 
best  policy,  460. 

Emergency  tariff  bill,  198. 

Eminent  domain,  74,  136. 

England,  increase  in  expenditures, 
29;  fees  in,  125;  early  taxes  in, 
139;  tariff  in,  178,  199;  excise 
tax  in,  219;  gave  up  property 
tax,  255;  income  tax  in,  289;  in- 
heritance tax  in,  333;  early  bor- 
rowing in,  388;  formation  and 
passage  of  budget,  421;  classes 
of  expenditures  and  revenues, 
422;  method  of  financing  Great 
War,  475. 

English  writers,  12  ff. 

Equalization  boards,  259. 

Equalization  of  assessments,  273. 

Escheat,  136;  extension  of,  313. 

Esprit  des  lois,  11. 

Essays  in  Taxation,  15. 

Ethics  and  Public  Finance,  7. 

Europe,  single  tax  in,  385. 

Evasion,  distinguished  from  shift- 
ing, 157;  under  income  tax,  287; 
under  inheritance  tax,  319,  324. 

Everett,  and  single  tax  381. 

Excess  profits  tax,  of  1917,  465; 
difficulties  with,  468;  law  exam- 
ple of  complexity,  517. 

Excise  duties,  defined,  99;  taxes 
upon  consumption,  203;  shifting 
and  incidence  of,  204;  modern 
form  of,  204;  problems  connected 
with  use  of,  205;  classes  of  goods 
taxed,  206;  industrial  and  social 
effects,  207;  to  counteract  pro- 
tective tariff,  208;  as  sumptuary 
tax,  209;  methods  of  levy,  210; 
objects  taxed,  211;  importance 


in  fiscal  systems,  211;  adminis- 
trative machinery,  213;  local 
machinery,  214;  early  use  in 
United  States,  215;  since  Civil 
War,  217;  in  foreign  countries, 
218. 

Executive  budget,  in  states,  436. 

Exemption,  of  property  from  taxes, 
agitation  f oru242,;  classes  of,  243 ; 
of  government  activities,  244; 
from  income  tax,  284;  from  in- 
heritance tax,  322. 

Expenditures,  of  Federal  govern- 
ment, 31;  of  states,  32,  51,  52; 
of  cities,  32,  34;  of  incorporated 
places,  33,  51;  unjustifiable,  41; 
and  national  income,  44;  during 
peace,  488,  491.  (See  Public  Ex- 
penditure.) 

Expense  of  service,  argument  for 
inheritance  tax,  315. 

Experiment  station,  expenditure 
for,  63. 

Experts,  fiscal,  employment  of,  511; 
in  Federal  government,  512;  in 
state  governments,  512;  tax  com- 
mission example  of,  513. 

Export  duties,  restriction  upon,  152; 
in  modern  fiscal  systems,  178. 

Extension  of  escheat,  313. 


Faculty  theory,  108;  problems  in 
measuring  ability,  109  ff;  not 
always  followed,  118. 

Fairhope,  single  tax  colony,  383. 

Famine,  example  of  emergency,  445. 

Federal  government,  expenditures 
of,  31;  for  protection,  52;  ad- 
ministrative expenditures,  57; 
legislative  expenditures,  58;  for 
consular  and  diplomatic  services, 
61;  taxes  corporations,  360; 
taxes  transfer  of  shares,  362. 
(See  United  States.) 

Fee,  defined,  121;  examples  of,  121; 
semi  compulsory,  122;  character- 
istics of,  123;  and  police  power, 
125;  in  England,  125;  in  France, 


524 


OUTLINES   OF   PUBLIC  FINANCE 


126;  in  United  States,  126;  as 
salary,  127;  social  and  political 
aspects,  128;  and  special  assess- 
ment, 130. 

Fels  fund,  for  single  tax  propa- 
ganda, 378. 

Fels,  Joseph,  originator  of  Fels 
fund,  378. 

Feudalism,  expenditures  under,  24. 

Field  of  government  activity,  15. 

"Fifteenths,"  form  of  revenue,  140. 

Finance,  meaning,  2;  administra- 
tion of  municipal,  439. 

Financial  and  fiscal,  3. 

Finanzwissenschaft,  12. 

Fines,  137. 

Fiscal  and  financial,  3. 

Fiscal  aspects  of  early  tariff,  188. 

Fiscal  subjects,  study  of  increasing, 
513;  by  National  Tax  Associa- 
tion, 514;  in  New  York,  514. 

Fiscal  systems,  characteristics  of, 
15. 

Fiscal  tendencies,  155. 

Floating  debt,  399. 

Florence,  early  studies  in,  10. 

Florida,  part  of  public  domain,  79. 

Forces  loans,  400. 

Fordney  emergency  tariff,  198. 

Foreign  corporations,  taxation  of, 
359. 

Forests,  public  retention  of,  52;  in- 
direct effects  of,  82. 

Fourteenth  amendment,  257. 

France,  increase  in  expenditures  in, 
29;  fees  in,  126;  development  of 
tax  system,  142;  tariff  in,  200; 
excise  tax  in,  219;  tobacco  mon- 
opoly in,  221;  business  taxes  in, 
224;  gave  up  property  tax,  255; 
income  tax  in,  296;  inheritance 
tax  in,  333;  debt  and  national 
wealth,  411;  fiscal  plan  in,  424; 
method  of  financing  Great  War, 
477;  tax  measures  of  Great  War 
in,  478;  daily  expenditures  for 
Great  War  in,  495;  expansion  of 
note  circulation  in,  499. 

Franchise,  kinds  of,  338, 


Franchise  to  be,  taxation  of,  339. 

Franking  privilege,  abuse  of,  59. 

Franklin,  difficulty  in  borrowing, 
402. 

French  writers,  10. 

Funded  debt,  399. 

Funded  income,  116,  281. 

Funds,  importance  of  administra- 
tion of,  20. 


Gadsden  purchase,  79. 

Gallatin,  Secretary,  and  War  of 
1812,  462. 

Gary,  land  values  in,  369. 

General  property  tax,  regressive  in 
effect,  115;  against  corporations, 
336.  (See  Property  tax.) 

George,  Henry,  and  Progress  and 
Poverty,  365;  social  vision  of,  365; 
proposed  to  take  rents,  368;  can- 
didate for  mayor  of  New  York 
City,  377. 

George,  Lloyd,  land  taxes  of,  385. 

German  writers,  12. 

Germany,  increase  in  expenditures, 
29;  tariffs  in,  200;  excise  tax  in, 
220;  gave  up  property  tax,  255; 
inheritance  tax  in,  333;  debt  and 
national  wealth,  411;  fiscal  plan 
in,  423;  preparatory  measures  for 
Great  War  in,  479;  use  of  loans 
in  Great  War,  480;  use  of  taxes 
in  Great  War,  481 ;  daily  expendi- 
ture for  Great  War  in,  495;  ex- 
pansion of  note  circulation  in, 
499. 

Gifts,  136;  taxation  of,  325. 

Glass,  Secretary,  on  appropriations, 
432. 

Good,  Representative,  and  budget 
bill,  433. 

Gorman- Wilson  tariff,  196. 

Gottlieb,  L.  R.,  on  war  costs,  494; 
497. 

Government,  activities  of,  1;  cal- 
culable field  of  activities  of,  15; 
demands  of,  74;  may  conduct 
industry,  83;  many  fields  of  ac- 


INDEX 


525 


tivity,  87;  exempt  from  taxes, 
244;  confidence  in  and  war 
finance,  459. 

Graduation,  under  income  tax,  284. 

Graph,  of  regular  degression,  112; 
of  irregular  degression,  113,  114. 

Gratuitous  services,  objections  to, 
75. 

Great  Britain,  special  assessment 
in,  132;  debt  and  national  wealth, 
411;  daily  expenditure  for  Great 
War  in,  495;  expansion  of  note 
circulation  in,  499.  (See  Eng- 
land.) 

Great  War,  cost  of,  54;  use  of  taxes 
by  the  United  States  in,  464;  rev- 
enue act  of  1916,  464;  of  1917, 
464;  of  1918,  467;  corporation 
taxes  under,  468;  United  States 
borrowed  extensively  during,  469; 
problems  did  not  end  with,  472; 
England  financed  through  loans 
and  taxes,  475;  France  financed 
by  borrowing,  477;  Central  Pow- 
ers used  loans  in,  479;  interest- 
ing comparisons  from  financing 
of,  482;  daily  expenditure  for, 
495;  expansion  of  money  and 
credit  affected  cost  of,  498;  cas- 
ualties of,  502.  (See  War,  and 
Cost  of  war.) 

Greece,  expenditures  of,  24;  in- 
heritance tax  in,  333. 

Greenbacks,  effect  on  Civil  War 
costs,  490;  effects  on  citizens, 
490. 

Gross  earnings  tax,  advantages  of, 
345;  favored  by  officials,  346; 
objections  to,  347. 

Grundsatze  der  Finanzwissenschaft, 
12. 

H 

Harding,  President,  on  budget,  435. 

Hearth  tax,  139. 

Highways,  cause  of  expenditure,  37, 

63. 

History,  and  Public  Finance,  5. 
Hungary,     income    tax    in,     296; 


financing  Great  War  in,  481; 
expansion  of  note  circulation  in, 
499. 


Illinois,  oaths  and  penalties  in,  261 ; 
license  on  automobiles,  228;  in- 
debtedness in,  409;  centralized 
fiscal  machinery  of,  438. 

Importer,  bears  burden  of  customs 
duty,  184. 

Impost,  early  revenue,  95. 

Impot  unique,  proposed  by  physio- 
crats, 363. 

Income,  earned  and  unearned,  116; 
difficulties  in  defining,  279;  gross 
and  net,  280;  capital  and,  280; 
funded  and  unfunded,  281;  dif- 
ficulties in  ascertaining,  286;  and 
property,  286;  single  tax  on,  364. 

Income  tax,  early  use  in  England, 
141;  in  Prussia,  147;  found  in 
states,  154;  shifting  of,  162; 
mark  of  developed  fiscal  system, 
278;  methods  of  levy,  283;  ex- 
emptions under,  284;  graduation, 
284;  method  of  determining,  286; 
in  England,  289;  success  in  Eng- 
land, 293;  in  Prussia,  293;  in 
foreign  countries,  295;  in  the 
United  States,  296;  of  Civil  War, 
297;  of  1894,  298;  constitutional 
amendment  for,  299;  adopted  in 
1913,  300;  Act  of  1916,  303;  de- 
fects in  Federal,  304;  in  states, 
306;  Act  of  1917,  465;  Act  of 
1918,  467;  in  England  during 
Great  War,  477;  law  as  example 
of  complexity,  517. 

Incorporated  places,  expenditures 
of,  33,  51. 

Incorporation  fee,  338. 

Increasing  cost,  shifting  of  tax  on 
goods  produced  under,  173. 

Increment,  unearned,  not  confined 
to  land,  368. 

Indebtedness,  difficulties  in  han- 
dling, 248;  limitations  on,  268; 
characteristic  of  modern  fiscal 


526 


OUTLINES   OF  PUBLIC   FINANCE 


systems,  387;  economic  and 
political  effects  of,  393;  extin- 
guishing of,  397;  forms  of,  399; 
study  of  in  the  United  States, 
407;  of  various  countries,  409; 
per  capita  burden,  in  different 
countries,  410;  municipal,  442. 
(See  Public  debts.) 

Independent  treasury,  effects  of, 
416. 

India,  income  tax  in,  296. 

Indirect  tax,  105;  early  in  France, 
142;  modern  in  France,  143. 

Indirect  war  costs,  501. 

Individual,  interest  in  values  of 
land  and  buildings,  376. 

Individual  expenditures,  for  educa- 
tion, 63;  for  charity,  67. 

Industry,  condition  favorable  to 
state  management,  84;  revenue 
not  important,  89;  and  revenue 
duties,  178;  and  protective  du- 
ties, 180;  and  excise  duties,  207, 
220;  government  ownership  of, 
221;  and  method  of  financing 
war,  460. 

Information  at  source,  288. 

Inheritance,  not  a  natural  right, 
321. 

Inheritance  tax,  early  use  in  states, 
154;  not  of  recent  origin,  309; 
early  discussion  of,  311;  advo- 
cated at  present,  312;  applica- 
tion of  benefit  theory,  315;  con- 
forms to  modern  fiscal  concepts, 
316;  objections  weak,  318;  courts 
have  strengthened  position  of, 
320;  problems  arise  in  formu- 
lating laws,  322;  conflicting  jur- 
isdictions create  problems,  326; 
stability  desirable,  328;  advan- 
tages of,  328;  use  by  Federal 
government,  329;  use  by  states, 
331;  use  abroad,  333;  Federal, 
under  law  of  1916,  464;  under 
law  of  1917,  466. 

In  re  Finnen,  321. 

Insane,  expenditure  for,  68. 

Insurance,  social,  67. 


Insurance  companies,  taxation  of, 
357. 

Interest  in  Public  Finance,  16. 

International  complications  from 
public  borrowing,  396. 

Interest  rate,  importance  of,  402. 

Introduction  to  Public  Finance,  15. 

Investment,  returns  on,  25. 

Ireland,  inheritance  tax  in,  333. 

Italy,  study  of  fiscal  problems  in, 
9;  development  of  city-states,  10; 
tariff  in,  200;  excise  tax  in,  220; 
gave  up  property  tax,  255;  in- 
come tax  in,  296;  inheritance  tax 
in,  333;  debt  and  national  in- 
come, 412;  financing  Great  War 
in,  479;  daily  expenditure  for 
Great  War  in,  495;  expansion  of 
note  circulation  in,  499. 


Jackson,  President,  distribution  of 

public  funds,  416. 
Japan,  income  tax  in,  296. 
Judicial  system,  expenditure  for,  70. 
Justice,  principles  not  followed,  118. 

K 

Knights    of    Columbus,    and    war 
costs,  504. 


Laissez  faire,  and  fiscal  interest,  18; 

and  increase  of  expenditures,  29; 

losing  importance,  3&;  and  state 

industry,  87. 
Land,   assessment  of  in  England, 

140;  shifting  of  tax  on  value  of, 

163;   shifting  of  specific  tax   on, 

164 
Land  values,  not  all  unearned,  368; 

society  responsible  for  other  than, 

369. 

Law,  John,  and  public  land,  78. 
Laws,  tax,  need  simplification,  517. 
Leadership,  importance  of,  62. 
Legislative   expenditures,    Federal, 

58;  state,  59. 


INDEX 


527 


Legislatures,  limitations  by  state, 
257. 

Leroy-Beaulieu,  writer,  12. 

Les  six  Libres  de  la  Republique,  11. 

Levy,  defined,  99;  place  of  on  prop- 
erty, 246. 

License  taxes.    (See  Business  taxes.) 

Life,  loss  of  in  war,  501;  loss  of  in 
nineteenth-century  wars,  502; 
loss  of  in  Great  War,  502. 

Limitation,  on  taxes,  267;  on  in- 
debtedness, 268. 

Loan  policy,  success  of  United 
States's  in  Great  War,  471. 

Loans,  and  taxes  in  emergency 
financiering,  460. 

Local  option,  favored  by  single  tax, 
378;  struggle  for  in  Oregon,  380. 

Local  taxes,  in  England,  142. 

Long-term  obligations,  399. 

Louisiana,  business  taxes  in,  227; 
inheritance  tax  in,  331. 

Louisiana  purchase,  78. 

Lump  sum  tax,  shifting  of,  171. 

M 

McCormick-Good  budget  bill,  434. 

McCormick,  Senator,  and  budget 
bill,  433. 

McCullough  vs.  Maryland,  244. 

McKinley  tariff,  196. 

Madison,  President,  and  tariff,  191. 

Manufacturers'  associations,  on 
sales  tax,  474. 

Manufacturing  companies,  taxation 
of,  358. 

Market,  effect  of  extended,  on  shift- 
ing customs  duties,  184. 

Maryland,  budget  in,  436. 

Massachusetts,  income  tax  in,  307; 
taxation  of  corporations  in,  342. 

Maximum-minimum  tariff,  182. 

Mediterranean  route  of  commerce, 
influence  on  fiscal  studies,  10. 

Merchants'  associations,  on  sales 
tax,  474, 

Michigan,  rejection  of  gross  earn- 
ings tax,  348;  adopts  ad  valorem 
method,  351, 


Middle  Ages,  use  of  inheritance  tax 
in,  310. 

Middle  colonies,  tax  system  in,  149. 

Military  training,  effect  on  individ- 
ual, 54. 

Mill,  J.  S.,  on  income  tax,  101,  283; 
and  justice  in  taxation,  108;  on 
inheritance  tax,  311;  and  rents, 
364. 

Mines,  public  retention  of,  82. 

Minnesota  tax  commission,  favors 
gross  earnings  tax,  346. 

Mirabeau,  leader  of  physiocrats, 
363. 

Missouri,  and  single  tax,  381. 

Model  system  of  taxation,  517. 

Money,  periodic  exaction  of,  16; 
effect  of  change  in  value,  36; 
superficial  aspect  of,  447;  ex- 
pansion of  and  cost  of  Great  War, 
498. 

Money  market,  necessity  of  in  pub- 
lic borrowing,  388. 

Monopoly,  shifting  of  tax  on,  170. 

Montesquieu,  early  writer,  11. 

Mortgages,  taxation  of,  249,  265; 
shifting  of  tax  on,  249;  recording 
tax  in  New  York,  265. 

Municipal,  accounting,  meaning  of, 
440;  budgets,  use  of,  441;  fi- 
nances, administration  of,  439; 
indebtedness,  442. 

N 

Naples,  early  studies  in,  10. 

National  bank,  assessment  of  shares, 
247. 

National  conference  of  single  tax 
league,  platform  of,  366. 

National  income,  proportion  of  ex- 
penditure to,  44. 

National  Tax  Association,  15,  230  n; 
and  study  of  fiscal  problems,  514; 
and  model  tax  system,  517. 

Natural  right,  inheritance  not  a, 
321;  as  proposed  by  Henry 
George,  367. 

Net  earnings,  taxation  of,  348;  ob- 
jections to  tax  on,  349;  taxation 


528 


OUTLINES   OF   PUBLIC   FINANCE 


of  opposed  by  Connecticut  com- 
mission, 350. 

Net  returns,  shifting  of  tax  on,  171. 

New  England  colonies,  property  tax 
in,  232. 

New  York,  149,  150;  opposed  to 
tariff,  189,  231,  249,  259;  in- 
come tax  in,  307;  inheritance  tax 
in,  331;  annual  franchise  tax  of, 
341;  taxation  of  public  utilities, 
345;  special  franchise  tax  of,  355; 
tax  upon  transfer  of  securities, 
361;  and  single  tax,  382;  indebt- 
edness in,  408;  tax  conferences 
in,  514;  corporation  tax  example 
of  complexity,  517. 

New  York  City,  assessors  in,  274; 
relative  value  of  land  and  build- 
ings in,  376. 

Nineteenth-century  wars,  loss  of  life 
in,  502;  duration  of,  502. 

Nitti,  F.  S.,  on  expenditures,  30  n. 

Nonreproducible  goods,  shifting  of 
tax  on,  165. 

Nonrevenue  receipts,  91. 

Northern  colonies,  tax  system  in, 
148. 

Norway,  income  tax  in,  296. 

Note  circulation,  expansion  of  dur- 
ing Great  War,  499. 


Oaths,  238,  261;  in  Illinois,  261. 

Ohio,  tax  inquisitor  law  of,  262; 
power  of  tax  commission,  275. 

Ohio  plan  of  limitation,  269. 

Oleomargarine,  excise  tax  on,  210. 

Ontario,  business  taxes  in,  227. 

Oregon,  single  tax  campaign  in,  379; 
state  tax  commission  and  con- 
stitutional amendment,  381. 

Oregon  territory,  part  of  public  do- 
main, 79. 

Ottawa,  and  single  tax,  385. 


Panama  Canal,  borrowing  justified 
for,  392t 


Partnership  of  state,  argument  for 
inheritance  tax,  316. 

Payment  of  back  taxes,  argument 
for  inheritance  tax,  317. 

Payne-Aldrich  tariff,  197. 

Peace,  expenditures  during,  488, 
491. 

Peel,  Sir  Robert,  and  income  tax, 
289. 

Penalties,  137;  under  property  tax, 
261;  in  Illinois,  261;  use  of  in- 
heritance tax  as,  318. 

Pennsylvania,  use  of  inheritance 
tax,  331;  and  single  tax,  382; 
small  indebtedness  in,  408. 

Pensions,  68;  mothers',  67,  69;  old 
age  in  England,  69. 

Personal  element,  importance  of  in 
war  finance,  459. 

Personal  property,  defined,  235; 
value  of  compared  with  real,  241, 
242. 

Pestilence,  example  of  emergency, 
445. 

Petty,  early  writer,  12;  classifica- 
tion of  expenditures,  23. 

Philippines,  income  tax  in,  296. 

Physiocrats,  fiscal  contributions  of, 
11;  proposal  of  single  tax,  363. 

Pittsburgh,  and  single  tax,  382. 

Plehn,  C.  C.,  writer,  15;  on  single 
income  tax,  364. 

Police  power,  38  n\  and  fees,  125. 

Political  aspects  of  fees,  128. 

Political  campaigns,  single  tax  in, 
379. 

Political  restraint  on  revenue,  27. 

Political  Science  and  Public  Fi- 
nance, 5. 

Poll  taxes,  in  American  states,  222; 
objections  to,  223. 

Pollock  vs.  Farmers'  Loan  and 
Trust  Co.,  299  n. 

Poor  rates,  English,  95. 

Portugal,  inheritance  tax  in,  333. 

Post  office,  example  of  government 
enterprise,  84;  in  the  United 
States,  85;  motives  for  conduct- 
ing, 86. 


INDEX 


529 


Prsecarium,  early  revenue,  95. 

Price,  relation  to  shifting,  160;  ef- 
fects of  increased,  451;  and  taxa- 
tion, 455;  effects  of  changes,  500. 

Private  expenditures,  compared 
with  public,  25. 

Produit  net,  tax  on,  363. 

Profits,  tax  on  excess,  465;  difficul- 
ties with  tax  on,  468. 

Progress  and  Poverty,  365. 

Progress,  affected  by  excise  tax,  208. 

Progressive  Taxation  in  Theory  and 
Practice,  15. 

Progressive  taxes,  study  in  Italy,  10; 
discussed,  110;  effect  of  flat  rate, 
115;  under  income  tax,  285;  ap- 
plied to  inheritances,  324. 

Project  for  a  Royal  Tythe,  11. 

Property,  classification  of,  235;  and 
ability,  235;  personal  not  as- 
sessed, 239;  intangible,  240; 
court  interpretation  of  classifica- 
tion, 263;  status  of  classification, 
264;  principle  of  classification, 
264;  results  of  classification,  265; 
classification  of  in  Pennsylvania, 
266;  in  Connecticut,  266;  and 
income,  286. 

Property  tax,  early  use  in  states, 
154;  early  development,  230;  in- 
fluence of  democratic  ideals,  232; 
in  Southern  and  Western  states, 
233;  escape  of  personal  property, 
239;  evils  of  double  taxation, 
245;  handling  of  indebtedness, 
248;  regressivity  of,  251;  de- 
grades morals,  252;  intrenched 
in  the  United  States,  254;  un- 
satisfactory, 276;  and  corpora- 
tions, 336.  (See  General  property 
tax.) 

Property  tax  reform,  difficulties  with 
constitutions,  256;  in  real  estate 
assessment,  258;  in  personal 
property  assessment,  261;  clas- 
sification attempted,  263;  limita- 
tion on  tax  rate  and  borrowing, 
267;  separation  of  sources  of 
revenue,  269;  centralization  of 


authority,  272;  the  state  tax 
commission,  274. 

Proportional  taxes,  110;  effect  of 
flat  rate,  115. 

Protection,  expenditure  for,  52. 

Protective  aspect  of  early  tariff,  190. 

Protective  duties,  meaning,  180; 
and  revenue  duties,  180;  coun- 
teracted by  excise,  208. 

Prussia,  development  of  tax  system, 
145;  early  fiscal  reforms,  146; 
early  consumption  and  income 
taxes,  147;  business  taxes  in, 
225;  income  tax  in,  293. 

Public,  hostile  attitude  of,  to  cor- 
porations, 335;  effect  of  single 
tax  on  activities,  372;  more  en- 
lightened needed,  515. 

Public  activity,  change  in,  506. 

Public  buildings,  expenditures  for, 
60. 

Public  credit,  universality  of,  16; 
growth  of,  28,  39. 

Public  debts,  compared  with  pri- 
vate, 390;  payment  of,  390;  pur- 
pose of,  391;  economic  and  polit- 
ical effects  of,  393;  methods  of 
originating,  400;  problem  of  ad- 
ministering, 404.  (See  Indebt- 
edness.) 

Public  expenditures,  early  classifi- 
cation, 10;  importance  of,  18; 
considered  by  early  writers,  22; 
of  Greece  and  Rome,  24;  under 
feudalism,  24;  compared  with 
private,  25;  political  restraints 
on,  27;  changes  in,  27;  increase 
in,  28;  causes  of  growth,  37; 
supply  less  material  wants,  39; 
justification  of,  40;  economic  ef- 
fects, 41;  comparative  study  dif- 
ficult, 43;  classification  of,  46; 
by  census  bureau,  47;  according 
to  benefit,  49;  for  defectives,  de- 
linquents, and  dependents,  66; 
for  individuals,  71. 

Public  Finance,  definition  of,  2;  a 
division  of  Economics,  4;  relation 
to  Political  Science  and  History, 


530 


OUTLINES   OF   PUBLIC   FINANCE 


5;  to  Sociology  and  Ethics,  7; 
method  of  study,  8;  extent  of 
study,  9;  interest  in,  16;  studied 
under  different  heads,  17. 

Public  lands,  arguments  for  dis- 
posal, 77;  for  retention,  77;  of 
the  United  States,  78;  method  of 
disposition,  79;  success  of  policy, 
80;  policy  of  states,  81. 

Public  price,  defined,  134;  and  rate, 
134;  reduction  in,  135;  public 
interest  and,  135. 

Public  revenues,  early  classifica- 
tions, 76;  classification  of  cen- 
sus bureau,  90;  growth  in,  91; 
compulsory  nature,  94;  histori- 
cal development,  94;  motives  be- 
neath, 95;  factors  in  classifying, 
120. 

Public  utilities,  cause  of  expendi- 
ture, 37;  taxation  of,  343;  taxa- 
tion of  in  New  York,  345;  regu- 
lation and  taxation  of,  354. 

Pueblo,  single  tax  and,  382. 

Pullman,  land  values  in,  369. 


Quasi  single  taxers,  366. 
Quesnay,  leader  of  physiocrats,  11, 
363. 

R 

Rate,  defined,  99;  and  public  price, 
134;  applied  to  inheritance  tax, 
323. 

Rau,  K.  H.,  early  writer,  12;  and 
public  lands,  77. 

Real  property,  defined,  235;  value  of 
compared  with  personal,  241,  242. 

Reciprocity,  treaty  with  Canada, 
182;  in  French  tariff,  182. 

Red  Cross,  and  war  costs,  504. 

Regressive  taxes,  114;  general  prop- 
erty tax  regressive,  251. 

Regulation  of  public  utilities,  354. 

Regulative  activities,  38. 

Republican  party,  and  tariff,  196. 

Repudiation  of  debts,  early,  28;  by 
states,  390. 


Reserve  fund,  failure  of,  388. 

Retaliatory  tariff,  182;  in  McKin- 
ley  tariff,  196. 

Revenue,  political  restraint  on,  27; 
cost  of  collection,  60;  early  in 
England,  139;  in  France,  142;  in 
Prussia,  145;  in  American  col- 
onies, 147;  separation  of  sources 
of,  269;  apportionment  under 
single  tax,  374;  secured  quickly 
from  borrowing,  449;  act  of  1916, 
464;  act  of  1917,  464;  sources  of 
for  Great  War,  497;  overlapping 
of  sources  of,  509;  separation  of 
sources  of,  510. 

Revenue  duties,  meaning,  178;  and 
industry,  178;  and  protective 
duties,  180. 

Revenue  receipts,  90. 

Revenue  systems,  development  of, 
138. 

Revolutionary  War,  financing  of, 
149. 

Rhode  Island,  150;  opposed  to 
tariff,  189;  property  tax  in,  233. 

Ricardo,  on  income  tax,  100;  on 
inheritance  tax,  311;  on  rents, 
364. 

Right,  natural,  inheritance  not  a, 
321. 

Rivers  and  harbors,  committee  on, 
428. 

Rome,  expenditures  of,  24. 

Roosevelt,  Theodore,  favors  in- 
heritance tax,  313. 

Ross,  P.  V.,  on  inheritance  taxes, 
320. 

Rural,  burden  of  single  tax  in  dis- 
tricts, 375;  values  compared  with 
urban,  375. 

Russia,  increase  in  expenditure,  29; 
income  tax  in,  296;  inheritance 
tax  in,  333;  financing  Great  War 
in,  479;  expansion  of  note  circu- 
lation in,  499. 

S 

Salary,  instead  of  fee,  127. 

Sales  tax,  advantages  of,  473;   ob- 


INDEX 


531 


jections  to,  473;  shifting  and  in- 
cidence, 474. 

Salvation  Army,  and  war  costs,  504. 

Savings,  inheritance  tax  on,  319. 

Scotland,  gave  up  property  tax,  255. 

Scranton,  and  single  tax,  382. 

Seattle,  and  single  tax,  381. 

Secretary  of  the  Treasury,  and  ex- 
cise tax,  213;  and  independent 
treasury,  417;  and  book  of  esti- 
mates, 429. 

Secured  debts  tax,  266. 

Securities,  tax  on  transfer  of,  361; 
by  Federal  government,  362. 

Seligman,  E.  R.  A.,  14,  167  n;  on 
property  tax,  277;  on  English 
income  tax,  293;  on  war  costs, 
494,  495. 

Separation  of  sources  of  revenues, 
269;  advantages  of,  270;  dangers 
of,  271. 

Serial  bonds,  use  of  in  cities,  442. 

Service,  expense  of,  arguments  for 
inheritance  tax,  315;  value  of, 
argument  for  inheritance  tax,  315. 

Shifting,  distinguished  from  eva- 
sion, 157;  direction  of,  175. 

Shifting  and  incidence,  denned,  99; 
relation  to  justice,  157;  funda- 
mentally a  study  of  price,  159; 
of  poll  tax,  161;  of  income  tax, 
162;  of  land  taxes,  163;  of  tax 
on  nonreproducible  goods,  165; 
of  tax  on  buildings,  166;  of  tax 
on  monopoly,  170;  of  tax  on 
competitively  produced  goods, 
172;  influenced  by  elasticity  of 
supply  and  demand,  174;  of  cus- 
toms duties,  183;  of  excise  duties, 
204;  of  sales  tax,  474. 

Short-term  obligations,  399. 

Single  Tax  League,  platform  of,  366. 

Single  tax,  proposal  for  not  new, 
363;  on  incomes,  364;  proposed 
by  Henry  George,  364;  social 
claims  of,  not  proved,  370;  un- 
desirable features  and  difficulties 
of,  371 ;  effect  of,  on  public  activi- 
ties, 372;  administrative  difficul- 


ties of,  372;  modifications  of,  373; 
burden  in  rural  districts,  375; 
propagation  of,  377;  campaign  in 
Oregon,  379;  in  other  states,  381; 
outside  the  United  States,  383; 
emphasized  defects,  385. 

Sinking  fund,  early  use  in  England, 
405;  in  the  United  States,  406; 
in  cities,  442. 

Situs  of  property,  as  base  for  tax 
levy,  246;  as  base  for  inheritance 
tax,  327. 

Situs  of  securities,  as  base  for  tax 
levy,  246. 

Smith,  Adam,  published  Wealth  of 
Nations,  13;  classified  revenues, 
76;  on  postal  system,  85;  places 
taxes  on  shares  of  income,  104; 
and  faculty  theory,  108;  can- 
vass of  taxation,  101;  on  inherit- 
ance tax,  311;  on  rents,  364. 

Smuggling,  problem  of,  185. 

Social,  aspects  of  fees,  128;  effects 
of  excise  taxes,  207;  claims  of 
single  tax  not  proved,  370;  ef- 
fects of  public  borrowing,  395; 
point  of  view  has  gained  in  promi- 
nence, 510. 

Social  insurance,  67. 

Sociology,  and  public  finance,  7. 

South  Carolina,  dispensary  system 
in,  221. 

Southern  colonies,  tax  system  in,  149. 

Southern  states,  property  tax  in,  233. 

Spain,  inheritance  tax  in,  333. 

Special  assessment,  defined,  130; 
and  tax,  130;  and  fee,  130;  and 
special  tax,  131;  extent  of  use, 
131;  justice  of,  132;  in  Great 
Britain,  132. 

Special  franchise,  in  New  York,  249; 
taxation  of,  in  New  York,  355. 

Special  tax  and  special  assessment, 
131. 

Specific,  defined,  99;  objection  to, 
186. 

Specific  tax,  shifting  of  on  land,  164. 

Staatswirthschaft,  12. 

State  equalization  board,  259. 


532 


OUTLINES   OF  PUBLIC   FINANCE 


State,  partnership  of,  argument  for 
inheritance  tax,  316. 

State  tax  commission,  230  rc;  re- 
ports on  property  tax,  253;  ex- 
ample of  centralization,  275;  ac- 
tivities of,  275;  auditing  and  ac- 
counting, 275;  corporation  as- 
sessments, 276. 

State  taxes,  154. 

States,  expenditures  in  European, 
29;  expenditures  of,  32;  for  pro- 
tection, 55;  legislative  expendi- 
tures, 59;  for  education,  61;  for 
defectives,  67;  public  land  policy, 
81;  revenues  of,  93;  corporation 
taxes  in,  155;  use  of  income  tax, 
306;  use  of  inheritance  tax,  331; 
indebtedness  of,  407;  use  of  bud- 
get in,  435. 

Steuer,  early  revenue,  95. 

Stevens,  W.  S.,  favors  net  earnings 
tax,  349. 

Stoppage  at  source,  287. 

Stuyvesant,  Peter,  149,  231. 

Sumptuary  tax,  excise  duty  as,  209. 

Supplementary  reading,  general  list, 
21. 

Supply,  relation  to  shifting,  160; 
effect  of  elastic  on  shifting,  175; 
elastic  and  customs  duties,  183. 

Sweden,  inheritance  tax  in,  333. 

Switzerland,  increase  in  expendi- 
ture, 30;  income  tax  in,  296;  in- 
heritance tax  in,  333. 


Tableau  oeconomique,  11. 

Taft,  President,  budget  agitation 
under,  432. 

Tariff,  compared  with  bounty,  69; 
maximum-minmium,  reciprocity, 
retaliatory,  to  equalize  costs, 
compensating,  182;  early  at- 
tempts to  secure  in  United  States, 
188;  of  1779,  190;  of  1816,  191; 
of  1824  and  1828,  192;  compro- 
mise, 193;  Walker,  194;  of  1857, 
195;  of  Civil  War,  195;  McKin- 
ley,  196;  Gorman-Wilson,  196; 


Dingley,  197;  Payne-Aldrich, 
197;  Underwood-Simmons,  197; 
Fordney  emergency,  198;  in  Eng- 
land, 199;  in  France,  200;  in  Italy 
and  Germany,  200.  (See  Protec- 
tive duties  and  Revenue  duties.) 

Tax,  definition  of,  97;  important 
terms,  98;  economic  effects  of, 
100;  attempts  at  classification, 
103;  justification  and  measure- 
ment of,  106;  social  aspects  of, 
116;  as  regulatory  measure,  117; 
and  special  assessment,  130;  lim- 
itation of,  267;  Ohio  plan  of 
limitation,  269;  upon  banks,  356; 
upon  insurance  companies,  357; 
on  manufacturing  companies,  358. 
(See  kinds  of  taxes.) 

Tax  inquisitor  law  of  Ohio,  262. 

Tax  laws,  simplification  needed,  517. 

Tax  limitation,  by  fixed  rate,  267; 
by  limited  rate,  268;  by  limiting 
expenditures,  268. 

Tax  list,  defined,  100. 

Tax  maps,  260. 

Taxation,  and  prices,  455;  objections 
to  in  emergency  financiering,  456. 

Taxes  and  loans  in  emergency  finan- 
ciering, 460;  statistics  of,  for 
Great  War,  497. 

"Tenths,"  form  of  revenue,  140. 

The  Elements  of  Public  Finance,  15. 

The  Income  Tax,  15. 

The  Science  of  Finance,  14. 

The  Shifting  and  Incidence  of  Taxa- 
tion, 15. 

The  Theory  and  Practice  of  Taxation, 
14. 

Traite  de  la  Science  des  Finances,  12. 

Transfer  of  securities,  tax  on,  361; 
by  Federal  government,  362. 

Treasury  certificates,  issued  during 
Great  War,  470. 

Treasury  department,  organization 
of,  417;  later  modifications,  418; 
integrity  of,  419,  431. 

Treatise  of  Taxes  and  Contributions, 
12. 

Turgot,  leader  of  physiocrats,  1 1 , 363 . 


INDEX 


533 


U 

Underwood,  J.  H.,  on  inheritance 
taxes,  318. 

Underwood-Simmons  tariff,  197. 

Unearned  decrement,  370. 

Unearned  increment,  not  confined 
to  land,  368. 

Unemployed,  problem  of,  43. 

Unfunded  debt,  399. 

Unfunded  income,  116,  281. 

Uniform  tax  clause,  258. 

Unit  of  goods,  shifting  of  tax  on,  170. 

United  States,  increase  of  expendi- 
tures in,  30,  35;  public  lands  of, 
78;  method  of  disposition,  79; 
success  of  policy,  80;  conduct  of 
postal  system,  85;  fees  in,  126; 
special  assessment  in,  131;  excise 
tax  in,  215;  indebtedness  of,  and 
national  wealth,  410;  indebted- 
ness of,  and  social  income,  411; 
budget  in,  426;  daily  expenditure 
for  Great  War  in,  495;  expansion 
of  note  circulation  in,  499. 

Urban,  values  compared  with  rural, 
375. 


Valuation,  statistics  of  property, 
241;  of  public  utilities,  344. 

Value,  relation  between  a  tax  on 
and  earnings,  352;  social,  not 
confined  to  land,  368;  all  land, 
not  unearned,  368. 

Value  of  service,  argument  for  in- 
heritance tax,  315. 

Vancouver,  single  tax  in,  384. 

Vauban,  early  writer,  11. 

Venice,  borrowing  in,  388. 

Virginia,  report  of  joint  committee 
on  taxation,  351. 

Voluntary  loans,  400. 

Von  Justi,  early  writer,  12. 


Wagner,  writer,  12. 

Walker  tariff,  194. 

War,  cause  of  expenditure,  36,  54; 
best  example  of  emergency,  445; 
Revolutionary,  requisitions  un- 
der, 447;  burden  upon  present 
production,  447;  burden  not 
shifted  to  future,  452;  use  of 
taxes  in  financing,  454;  impor- 
tance of  personal  element  in 
financing,  459;  money  costs  of, 
484;  returns  from,  485.  (See 
Great  War.) 

War  Chest,  in  Germany,  389;  use 
of  in  Great  War,  480. 

War  of  1812,  use  of  excise  tax,  216; 
method  of  financing,  462;  cost 
of,  487. 

War  profits,  taxed  in  England,  477. 

Warehouses,  under  Walker  tariff, 
194. 

Washington,  single  tax  campaign  in, 
381. 

Ways  and  means,  committee  on, 
established,  427. 

Wealth  of  Nations,  13. 

Webster,  definition  of  income,  279. 

WeUs,  D.  A.,  14,  21;  on  property 
tax,  240. 

Western  states,  property  tax  in,  234. 

Whigs,  and  tariff,  194. 

White,  Chief  Justice,  decision  on  in- 
come tax,  301. 

Wisconsin,  income  tax  in,  306;  re- 
port on  tax  commission  of,  on  in- 
come tax,  307;  rejection  of  gross 
earning  tax,  348;  adopts  ad  va- 
lorem tax,  351. 

Woolen  tariff,  193. 

Woolens,  compensating  tariffs  on, 
183. 

Woolworth,  building,  socially  cre- 
ated value  in,  370;  site,  distribu- 
tion of  rental  from,  375. 


W  Y 

Wade,  F.  C.,  on  single  tax  in  Can-      Young  Men's  Christian  Association, 
ada,  384.  and  war  costs,  504. 

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